Learn More About Bankruptcy In New Jersey
We at Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, are committed to make sure you have all the information and resources at your disposal to make the best decisions possible when tackling the threat of bankruptcy. We regularly write blogs and create videos for the sole purpose of educating you, your loved ones, and those financially dependent upon you. There is no easy way to tackle the emotional difficulty of bankruptcy. The process, without help, can be traumatic. Just recognizing you need to declare bankruptcy can be a heartbreaking and devastating moment in someone’s life. None of this changes that for many people bankruptcy is the best option for debt relief.
Part of the bankruptcy process is selecting a bankruptcy attorney best suited for your needs. Looking for a firm to best represent you might feel overwhelming, as it seems like there’s an attorney at every corner insisting they are the best. They may be the best at what they do, but are they the best attorney for you?
We want you to know as much as possible about the process before you need to ever commit to any one path to finding debt relief. We invite you to watch our videos, read our blogs, scour our website, all so you can come to understand who we are and what we believe in. We hope our firm is suited to your needs. We welcome you to call us or fill out our online form to schedule your free consultation. We look forward to hearing from you and helping you make the best decisions possible for both now and the future.
Small Business Bankruptcy in Plain English
What follows is a primer for those facing the threat of bankruptcy. If you’re an attorney looking for a how-to manual for small business bankruptcy or a law student searching for a citation on your doctoral thesis, then you might be better served reading our other content. We at Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, write a great deal about bankruptcy. Much of it contains legal citations, references to Bankruptcy Code minutia, and recently published legal decisions. For bankruptcy nerds like us, this material is fascinating. To someone unacquainted with legal terminology, it’s dense and indecipherable. Those outside the legal field need a translation from jargon to English.
With COVID-19 putting the world into a tailspin, small-businesses have been plagued with obstacles that jeopardize financial success. You have come here looking for solutions. Maybe you are struggling. Maybe you are worried about your future. At times like these, you don’t need a vague promise of hope; you want to know something practical and factual. You want something straight-forward and clear. What follows may be what you’re looking for.
Is bankruptcy Right for Me? Which Type of Bankruptcy Should I File?
Before you declare bankruptcy, you need to ask if this is the best solution. That depends on several factors. If your business is struggling to turn a profit (or, worse, struggling and failing to make a profit), there is a need. You might even have a general sense of which bankruptcy solution makes sense for your business. However, it is also vital to understand alternatives to bankruptcy you can take instead. If banks are easily extending credit to you, if you have a cash reserve set aside, if a larger company like Google or Amazon are bidding to purchase your patented software, or if your rich uncle wrote you into his will days before passing on, then you have an alternative to bankruptcy.
Given the need for bankruptcy, which type of bankruptcy works for your specific situation? In order to answer, you need to assess the viability of your business. This can be challenging for the owner to assess. To you, your business is a product of hard-work, years of work, immense sacrifices, and even pure emotional and personal attachment. This is your baby. However, you need to remember that your decisions will affect your employees and their families. That requires honest, sometimes painful, assessment.
Let’s pretend you did not have to worry about the majority of your old debt. Would your business be profitable? Before you follow your instincts and say “Absolutely,” let’s be critical. Has your business adapted to new trends of societal needs? Can it adapt? You could be the best horse and buggy emporium in the United States, but so what? Machine shops are obsolete ever since China started manufacturing for a fraction of the cost we do here. I’ve represented printers who insisted a taxi medallion was one of the safest investments one could make. Then, Uber came onto the scene. Times change fast and many small businesses can’t keep up.
If it makes no sense for a company to continue, then it’s best to liquidate. Liquidation can occur in Chapter 7 or Chapter 11 Bankruptcy. Liquidation options also exist under state law, exclusive of bankruptcy, such as under an Assignment for the Benefit for Creditors. Chapter 11 is best if you want to have control over the winding-down of operations or structure a sale of assets. If you want to walk away, however, then Chapter 7 is the best answer.
However, let’s assume the business is viable. There is a demand for your product and/or service, your business-model is solid, and revenue is either coming in or expected to come in. Despite keeping the company viable, you still need to file for bankruptcy. Perhaps a situation outside your control is hurting business, such as COVID-19. Perhaps your business is embroiled in a lawsuit. Perhaps your business is suffering from a few bad decisions that you’ve since learned from. The circumstances might leave you devastated, but you are in actuality fortunate. We feel there is nothing more rewarding than helping a good company put itself together again. Chapter 11 Bankruptcy can help businesses shed debt and bad assets, tune-up operations and management, and help keep creditors at bay while the engine roars back to life.
Chapter 11 Bankruptcy is much like Chapter 13 Bankruptcy. The big difference is that Chapter 13 is exclusively for individuals filing bankruptcy. Businesses seeking to reorganize can only file under Chapter 11. Of course, there are issues with Chapter 11. It was designed with large businesses in mind. Congress’s oversights have historically led to things becoming more difficult for both small businesses and individuals who’re forced to file Chapter 11 because they exceeded the debt limitations of Chapter 13.
However, things have over time improved somewhat for small businesses filing bankruptcy. The Bankruptcy Reform Act of 1994 served as the first substantive amendment to the Bankruptcy Code since 1984. This amendment introduced the concept of the “Small business debtor” to Chapter 11 in an attempt to alleviate some of the burdens on a small business debtor and lessen the costs. It shortened some timeframes and allowed the combination of the disclosure statement and plan. However, for many, these differences were not significant enough.
Subchapter V offered a more substantive improvement to how small business bankruptcies are administered. On August 23, 2019, the Small Business Reorganization Act of 2019 (or “SBRA”) was enacted into law. The SBRA made many substantive and procedural changes to the Bankruptcy Code. It requires use of the following mandatory local forms:
The Bankruptcy Court has adopted certain interim changes to the Federal Rules of Bankruptcy Procedure in order to offer guidance for implementation of the new Act. It provides guideposts for the fee structure, Subchapter V trustee’s duties, and debtor responsibilities.
In many ways, Subchapter V is a game changer. While businesses still cannot file Chapter 13 Bankruptcy, Subchapter IV now works in a near-identical fashion to Chapter 13. The process has never been easier.
Subchapter V Does Not Require Voter Approval
Of all the requirements for approving a Chapter 11 Plan of Reorganization, the most challenging is getting creditor approval. Traditional Chapter 11 plans segregate creditors into groups of similar creditors. For example, creditors secured by a particular asset may comprise one group, while unsecured creditors are sorted into another. Approval of most plans (referred to as confirmation) requires convincing one group of creditors to vote in favor of the plan. As expected, it’s a challenge to convince creditors who will be paid pennies on the dollar to vote in favor of confirmation. Further complicating matters, the process of disclosure of the plan and vote solicitation is expensive.
The SBRA ended 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 Subchapter IV Plan is akin to how a Chapter 13 Bankruptcy Plan is confirmed. So long as the plan doesn’t break any prior Bankruptcy Code provisions (the plan proposed is in good faith, fair and the debtor can pay and/or do what it claims it can), then the plan will be approved. Soliciting a creditor buy-in is not required.
Another time-consuming obligation for a Chapter 11 debtor is the obligation to file monthly operating reports (MOR’s). From the day you file your petition until the date the Bankruptcy Court enters a final decree closing, dismissing or converting the case to another chapter in bankruptcy, a Chapter 11 debtor must file an MOR every month. MOR’s disclose all sources of revenue and expenses during the bankruptcy process. These reporting requirements must be followed so the United States Trustee can properly supervise the administration of the case. Should a debtor fail to comply with the operating and/or reporting requirements, the case may either be dismissed or converted into a Chapter 7 Bankruptcy.
But that’s not the only use of an MOR. They’re also used to determine the appropriate fee that is assessed by the Office of the United States Trustee. Chapter 11 debtors must pay a quarterly fee to the United States Trustee Program for the same duration you need to file MOR’s. Or, at least, you will unless you file under Subchapter V.
Subchapter V debtors are not required to pay quarterly fees. In addition, the reporting requirements are less burdensome.
A Subchapter V Debtor Does Have Some Additional Requirements
Subchapter V debtors are required to comply with deadlines not imposed in other Chapter 11 Bankruptcy cases. Specifically –
The Bankruptcy Court will hold a status conference no later than 60 days after the case is filed “to further the expeditious and economical resolution” of the subchapter V case.
No 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 no 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.
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 Bankruptcy cases. Rather, 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). It's 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? Unsecured creditors (credit cards, unsecured lines of credit, vender debt, etc.) will typically be paid a small percentage of what is owed over a three- to five-year period. Individual businesses can make choices about which leases it wants to keep or reject. They can cure past due loan payments, discharge certain taxes or pay back other taxes over time. They can reduce the amount they owe on mortgage debt or other secured claims or walk away from selected over-secured assets. Arguably most important of all, any individual business under bankruptcy reorganization gains a respite from collected 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.
Have you read the article to this point? Do you have more questions? Then it’s time we meet. Even if you are only 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. Our free consultation might prove priceless.
NJ Bankruptcy Checklist & Resources List
Below, you can find a list of all documents mentioned in the article above.