Learn More About Bankruptcy In New Jersey
At Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, it is our commitment to make sure you have access to as much information and education as you need to make a good decision for yourself and your family. We are regularly writing blogs and creating videos with you in mind, recognizing that bankruptcy is both a complicated and emotional topic. Filing bankruptcy is something nobody ever aspires to, but when the time comes and you can see no debt relief in sight, then it may well be your best option.
It seems like there are bankruptcy attorneys on every corner, so choosing the right firm to take this journey with you is not simple. We invite you to watch videos, scour the website, read the blogs and learn all you can about who we are and what we believe, so you can determine if our firm is a good fit for your needs. If you are looking for representation with compassion, then you are in the right place. Take all the time you need, then give us a call, or fill out the online form to schedule your free consultation. We look forward to hearing from you and helping you to make the best decisions possible for both now and the future.
Small Business Bankruptcy in Plain English
If you are an attorney looking for a how-to manual for small business bankruptcy practice or an academic in need of a citation for a paper, this article is not for you. I write a lot of content on bankruptcy and I have found that most of it is filled with legal citations, references to Bankruptcy Code sections, or discussing a decision that was recently published. While all this is incredible interesting to me as a bankruptcy nerd, it is not always user friendly for the common Joe.
Given the tailspin COVID-19 has put the world into, particularly small-business, I thought it appropriate to give some guidance to all those struggling and looking for solutions. Not hope and dreams, but real-world solutions to actual needs. Here is some practical information in simple to understand terms.
The first question that may come to mind: Is bankruptcy right for me, and if so, which type of bankruptcy should I file?
Whether bankruptcy is the best solution is always a fact sensitive question. If your business is struggling to make ends meet, there is a need. Chances are, if you are reading this there is a bankruptcy solution that makes sense for you. The best way to determine if bankruptcy is the best solution is to ask, when is bankruptcy not a good solution? If banks are easily extending you credit, if you have a cash reserve set aside, if your patented software is just about to be purchased by Google, if have a rich uncle that passed-away and left you a huge inheritance, then a conversation with a bankruptcy attorney is not worth the visit.
The question is not usually whether bankruptcy makes sense, it is which type of bankruptcy works for the situation. To answer that question, one must have an honest understanding of the viability of the business. This is always hard for small business owners. To you the owner, the business is not just a thing, it is the product of hard-work, immense sacrifices of time and resources, and intertwined with emotional and personal attachments. You built it, you identify with it, it is part of who you are and the decisions you make affect employees and their families.
Imagine, if you did not have to worry about most of the old debt, would the business be profitable? I know the first instinct is to say, of course it would. Yet, there are many businesses that have just not adapted to new trends or societal needs. An auto upholstery fabricator’s best days passed with the golden age of muscle cars; machine shops died out as China started making everything from our scrap and shipping it back to us a finished goods at a fraction of what it would take to manufacture it here. I cannot tell you how many printers I have represented and to own a taxi medallion was one of the safest investments one could make until Uber.
If the company just doesn’t make sense to continue, we are usually talking about a liquidation. Liquidation can occur in chapter 7 or chapter 11. There are also options under state law, exclusive of bankruptcy: an Assignment for the Benefit for Creditors, for instance (insert link to our blog). We would file chapter 11 if we wanted to have control over the winding-down of the operations or structure a sale of assets. If we just want to walk away, chapter 7 is usually the best answer.
But let’s say the business is viable. Demand for the product or service is there, your business-model is solid, you have revenue that is coming in or expected to be coming in. Perhaps the business ran into temporary hard time (think Coronavirus), it got embroiled in some lawsuit, or maybe the business just made some bad decisions that now you have learned from. Great! There is nothing more rewarding that helping a good company put the pieces of the puzzle back together. Shed the debt and bad assets, tune-up the operations and management, and let us get the machine humming. A chapter 11 lets us do just that while keeping creditors at bay while we get it all figured out.
A chapter 11 is like a chapter 13, except chapter 13 is exclusively for individuals. Businesses that want to reorganize can only file under chapter 11. Chapter 11 was designed with large corporations in mind. In drafting the bankruptcy laws, Congress didn’t all get together and think about writing laws to save the little guy. That has historically made things more difficult for small business and especially difficult for those individuals that wanted to reorganize but forced to file chapter 11 because they exceeded the debt limitations of chapter 13.
The Bankruptcy Reform Act of 1994 was the first substantive amendment to the Bankruptcy Code since 1984. The 1994 Act introduced the concept of the “small business debtor” to Chapter 11. These amendments attempted to alleviate some of the burdens on a small business debtor and lessen the costs. It also shortened some timeframes and allowed the combination of the disclosure statement and the plan. In my mind at least, the differences were not that significant.
Things have now changed. Enter, Subchapter V. Only now has there been a substantive improvement to how small-business bankruptcies are administrated. On August 23, 2019, the Small Business Reorganization Act of 2019 (the “SBRA”) was enacted into law. The SBRA makes many substantive and procedural changes to the Bankruptcy Code and requires use of the following mandatory local forms:
The Bankruptcy Court has adopted certain interim changes to the Federal Rules of Bankruptcy Procedure intended to offer guidance for implementation of the new Act and provide guideposts for the fee structure, subchapter V trustee’s duties, and debtor responsibilities.
Sub chapter V is a game changer. Remember how I said that businesses could not file chapter 13, well now sub-chapter IV works nearly identical to a chapter 13. Things have gotten a whole lot easier.
Subchapter V Does Not Require Voter Approval
The most challenging requirement for approving a chapter 11 plan of reorganization is the need to get creditor approval. Traditional chapter 11 plans segregate creditors into groups of similar creditors. For instance, creditors secured by a particular asset may be in one group, or unsecured creditors may all be in another group. To approve most plans (referred to as confirmation) requires getting at least one group of creditors to vote in favor of the plan. As you can imagine, getting creditors that most likely will be paid pennies on the dollar to vote in favor of confirmation is a challenge. The process of disclosure of the plan and vote solicitation is also expensive.
The SBRA did away with the requirement to have an impaired accepting class of claims so long as the plan does not discriminate unfairly and is “fair and equitable.” See § 1191(b). Confirmation of a sub chapter IV plan is akin to how a chapter 13 plan is confirmed. As long as the plan doesn’t break any of the Bankruptcy Code provisions; is proposed in good faith and fair; and is feasible (meaning the debtor really can pay or do what it says it can); then the plan will be approved. There is no need for soliciting creditor buy-in.
Another time-consuming obligation for a chapter 11 debtor is the obligation to file monthly operating reports (MOR’s). From the date of filing the petition until the date the Bankruptcy Court enters a final decree closing, dismissing, or converting the case to another chapter in bankruptcy, and then quarterly until the case is closed, a chapter 11 debtor must file an MOR. An MOR discloses all sources of revenue during the period and all expenses. These reporting requirements must be followed so that the United States Trustee can properly supervise the administration of the case. Accordingly, the debtor's failure to comply with the operating and/or reporting requirements may result in the dismissal or conversion of the case to a case under chapter 7 of the Bankruptcy Code.
The MOR’s are also used to determine the appropriate fee that is assessed by the Office of the United States Trustee. Debtors in chapter 11 cases must pay a quarterly fee to the United States Trustee Program for the same duration it is required to file MOR’s.
Great news! Subchapter V debtors are not required to pay quarterly fees and the reporting requirements are less onerous.
A Sub Chapter V Debtor Does Have Some Additional Requirements
Sub chapter V debtors are required to comply with deadlines not imposed in other chapter 11 cases. Specifically –
The Bankruptcy Court will hold a status conference not later than 60 days after the case is filed “to further the expeditious and economical resolution” of the subchapter V case.
Not later than 14 days before the status conference, “the debtor shall file with the court and serve on the trustee and all parties in interest a report that details the efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization.”
The subchapter V debtor shall file a plan not later than 90 days after the petition date, except that the court may extend the period “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” 11 U.S.C.11 U.S.C. § 1189 (b).
The subchapter V debtor also has a duty to cooperate with the subchapter V trustee. The appointment of a subchapter V trustee is unique to subchapter V. In contrast, a trustee is not usually appointed in chapter 11 cases. Instead, the debtor becomes a debtor-in-possession and acts as a fiduciary of its own estate (in most cases, a trustee only gets appointed if the debtor does something wrong). Its too early to tell if the inclusion of a subchapter V trustee is a blessing or a curse. I suspect it’s a little of both.
What can a business do through a bankruptcy reorganization? Of course, unsecured creditors (think credit cards, unsecured lines of credit, vendor debt, etc.) will typically be paid small percentage of what is owed and over a three to five-year period. The business can make choices about which leases it wants to keep or reject. It can cure past due loan payments, discharge certain taxes or pay back other taxes over time. It can reduce the amount it owes on mortgage debt or other secured claims or walk away from selected over-secured assets. Perhaps most importantly, it gets a respite from collection efforts by virtue of the Automatic Stay: creditors must stand-down and give the business a period to catch its breath while it figures out how to reorganize.
You Have Questions? I Have Answers.
If you have read this article to this point, then its time that we meet. Even if you are simply curious about how the law applies to your set of circumstances, or what your options are. If you are ready to get help, let’s have a conversation. A consultation is priceless, but free to you.
NJ Bankruptcy Checklist & Resources List
Below, you can find a list of all documents mentioned in the article above.