For an entrepreneur, one of the most distressing aspects of filing for bankruptcy can be imagining its aftermath — can I continue to own my business after a Chapter 11 filing?
With extensive experience in this area, Jennis Morse Etlinger attorney Mary Joyner says that under certain circumstances, the answer is yes.
Typically, a judge in a Chapter 11 procedure looks at the business, its debts, and the ownership structure when the bankruptcy is filed. If the debts greatly exceed the business’s overall value, shareholders may lose the equity they put into the business prior to bankruptcy.
As the case moves forward after filing — assuming the business is viable and is continuing to operate — there will be a need to recapitalize the company. Depending on the resolution of financial issues with creditors, owners may be able to inject fresh capital into the business and continue in an ownership role.
“A Fresh Start”
“The whole goal of bankruptcy is a fresh start,” Joyner states. “This can involve either continuing the existing business or starting a new one.”
If the financial challenges that led to the bankruptcy filing are strategically mitigated by an experienced legal team like Jennis Morse Etlinger, there’s an opportunity for the business to continue, the owner(s) to remain in place, and even for the firm to continue working with existing clients. See this recent Jennis blog for more information.
In Joyner’s experience, many who file for bankruptcy and want to continue as entrepreneurs are often envisioning a new start for their company — or the start of a new firm — before the bankruptcy is complete.
Early Timing Provides More Options
If a company is in a precarious financial situation, get legal help as soon as possible, to maintain the widest array of options to accomplish various goals, says Joyner. Waiting until vendors have cut off the company, or delaying until executing payroll becomes a challenge, can decrease the alternatives available during the bankruptcy process.
“Acknowledge that you need assistance,” she adds. “We are here to help.”
It can be harder to get vendors to work with a business experiencing financial difficulties if they haven’t been paid properly and on time.
Transparency Is Key
To maximize the effectiveness of the bankruptcy process, it’s important to provide full disclosure to the legal team. During the initial bankruptcy consultations, being open and conveying all relevant information to the legal team will save time and money and help maximize the effectiveness of the bankruptcy process.
If issues emerge later based on missing information, the plan can get sidetracked by the legal team having to amend the original filing, which incurs more fees. Being honest also builds a relationship based on mutual trust and diligence between the client and the legal team.
Sometimes, a lack of transparency by bankruptcy filers — or waiting too long to engage a legal team — can stem from fear or embarrassment. But there’s a payoff for those who engage an experienced bankruptcy firm like Jennis early on — and maintain full disclosure.
Tools For Business Owners
That’s because there are effective bankruptcy tools available, including some that may be surprising. For instance, a business undergoing financial challenges can cause its facility lease(s) to appear to be in default. But judges recognize that filing bankruptcy does not indicate a default by itself, Joyner points out. “There may be other reasons that will legitimately lead to a facility lease default, but not just a filing,” she explains.
Additionally, a landlord can’t evict a business just for filing. Bankruptcy judges understand that many businesses can’t operate without a facility. There are tools within bankruptcy law to help the client catch up on financial arrears, Joyner says, including negotiating with the landlord for the business to remain in its location so that it can continue to operate.
“The goal of bankruptcy is to help businesses reorganize and continue,” says Joyner, “because well-functioning businesses are good for the economy. There are tools to help business owners keep their business. Contact Jennis if you are thinking about filing for bankruptcy, and we’ll be happy to review your options.”