By Charles Moster
Your business has thrived as a leading distributor of computer monitors. As the CEO/Founder, you have assembled an excellent management team and maintained double digit growth in an expanding market. Just as you are about to put your third plant on-line, the stock market experiences its most significant decline since the Great Depression. Almost overnight, your ability to obtain credit seems to vanish and several of your largest customers have cancelled pending orders.

Suddenly your once thriving business is faced with one crisis after another in rapid succession – precipitous decline in revenue, defaults on key loans with lenders, and delays in paying vendors. Ultimately, you fall behind in paying employee withholding and Uncle Sam comes knocking on your door!

So is Chapter 11 bankruptcy is a viable option for your business?  Here’s a quick review of the 5 critical questions to consider before embarking on this adventure:

1.  Can your business become profitable again if this crisis is averted?
This is the key question which determines whether the Bankruptcy Court will allow a business debtor to continue in business and emerge from Chapter 11 with Court protection. In bankruptcy jargon the issue is whether a reorganization is “in prospect”. Bottom line, if the Court restructures your debt via Chapter 11 is the business still viable? If not, it’s not worth the effort and the Court will deny Chapter 11 bankruptcy protection and you will have to consider Chapter 7. Your first inquiry is strictly business nuts and bolts, balance sheets, profit and loss, and marketing plans. Can you still make a profit out of selling your product or service?

2. Can you fight back against your bank creditors with secured loans?
This is another pivotal question and needs to be carefully examined before going down the
Chapter 11 bankruptcy road. Although this is a complex question, the answer once again is based on whether a plan is in prospect. A secured creditor will move to call your loan, accelerate, and reclaim all collateral, i.e., bank deposits, property, furniture, whatever it has. This is done through what is called a “Relief from Stay Action”.  Expect the creditor(s) to file these actions shortly after you file. If you do not have what it takes to win, your bankruptcy case will be very short lived! Therefore, this question of “survivability” has to be addressed immediately by your bankruptcy attorney before you decide whether Chapter 11 bankruptcy reorganization is a viable option.

3. If you beat the first onslaught by secured creditors, what’s next?
That’s when the adventure begins. The bottom line is that you must work with your bankruptcy attorney to devise a restructured payout plan to your secured, unsecured, and priority creditors that reduces or defers payments over a defined term, usually several years. The payout proposal is called your Chapter 11 Plan.

4. How do I decide what debt can be restructured?
Again, a complex question that your bankruptcy attorney can help you answer. Simply put, secured claims can be restructured based on the value of the collateral, not the amount of the loan – otherwise known as a “cram down plan”. Whatever is left over is treated as an unsecured claim which can be substantially reduced. Claims of employees or government agencies, etc., are given special protection under the bankruptcy laws and need to be repaid as “priority” claims (before unsecured claims).

5. If I’m bankrupt, how do I pay for an attorney?
The bankruptcy laws allow you to pay your attorney directly from the operations of your business but it is subject to approval by the Court. Typically, the law firm is paid a retainer to start the process and files the Court papers in Bankruptcy Court. Thereafter, all invoices must be submitted to the Court for approval.

Your decision to seek bankruptcy protection is complex and involves business and legal issues which must be carefully examined. Make sure that your business undergoes a thorough examination before the decision is made.