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Look before you leap into owning your own business! A cautionary tale.

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Too often we have seen people who pursued the dream of owning their own business without careful thought and preparation. The result can be financial and personal heartache, and a personal bankruptcy.

Take the case of George (not his real name). After retiring from the military he thought starting up a food cart business would be a way to make money and stay engaged. He was able to get a substantial SBA loan, which was used to buy the food trailer and a truck to pull it. He leased new food preparation equipment and leased space for it. His wife co-signed. Within 6 months, the business was failing and he was behind on rent and struggling to make ends meet.

George’s wise move was to recognize the situation was out of control and not to turn a blind eye to it. We reviewed the business finances and both quickly agreed he should get out before more damage was done. The leased equipment, trailer and rental location were surrendered to the leasing company, business lender and landlord. Fortunately, George had not run up bills for unpaid payroll or sales taxes, and did not have unpaid bills for fresh produce or meat. These would have been major problems for which even a bankruptcy would not help him.

George’s mistakes?

  1. He did not have any experience running this business or indeed any business. Thus he did not know how to market and was not able accurately to predict his cash flow.
  2. He over-extended himself with debt, which he personally guaranteed. He got this because of his then-stellar credit and military credentials.
  3. He did not research the market. Who else is in the food truck business? How are they doing? What do they do that makes them successful? Is there a niche or a clientele that is not being served? Being the newcomer in a business with established players who know what they are doing is never good unless you have reliable customers lined up.

Fortunately, with our help George got out and has found a job using his training and skills. He and his wife now have the fresh start they need. Both are wiser and happier.

If you are having trouble with a business venture, getting the right financial and legal advice is critical. We have helped many many people like George sort things out.

Bankruptcy and Business Litigation

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When you own or operate a business venture, you know that legal challenges are often a cost of doing business. A bankruptcy petition can offer some benefit in the midst of a business dispute. If you are involved in a dispute that threatens the viability of your business, but the long-term prospects are good, you can use the bankruptcy laws to minimize the impact of litigation. If, on the other hand, your business has little chance of success, a Chapter 7 liquidation proceeding can be the most effective way to shut down business operations.

The Advantages of Filing a Bankruptcy Petition

The first, and perhaps most powerful benefit you get when you seek protection in bankruptcy is the automatic stay. With the automatic stay, you have the power of the bankruptcy court behind you, prohibiting creditors from calling you, writing you, taking legal action against you or using any means other than the bankruptcy proceeding to collect the debt from you. A creditor can petition the bankruptcy court to lift the automatic stay, but such a request is rarely granted, provided you don’t engage in fraud or misrepresentation, and that honor your commitments in the bankruptcy process.

If you plan to close your business, your best option is a Chapter 7 filing. However, if you need temporary relief, but believe that your business has long-term potential, you may want to proceed under Chapter 11. A Chapter 11 petition allows you to restructure or renegotiate your debt, so that it becomes affordable. You’ll have to submit a reorganization plan, which must be approved by your creditors and by the court.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Using Bankruptcy to Save Your Business

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Small business ownerYour business can run into hard times for a variety of reasons. Sometimes, it’s just not a viable business and it’s probably best to just close it down. But if you know that you have a good business plan, a solid market and the skill and knowledge to make it work, but are facing a temporary cash flow challenge or simply need to restructure, bankruptcy can help you get relief from creditors and take the steps to rescue your business.

Business Reorganization under Chapter 11

If you want to keep your business in operation, you can file a petition under Chapter 11 of the Bankruptcy Code. The business owners can continue to operate under bankruptcy court and more loosely under creditor supervision until the business is sold, a reorganization or liquidation plan is approved, or until the case is dismissed or converted to a Chapter 7 liquidation. Chapter 11 is intended to allow businesses in financial trouble to try to preserve or recover value that would not be there if the business simply shut down or was liquidated in Chapter 7.

Once a Chapter 11 bankruptcy petition is filed, creditors are prohibited from calling, writing, filing suit or engaging in legal action to recover a debt, except through the bankruptcy proceeding. In addition, while the reorganization plan is being worked out, the business may not be required to pay all its outstanding debts, allowing the business time to gather resources to move forward. In most instances, the owners of the business are allowed to continue to operate the business during the formulation of the reorganization plan. However, the bankruptcy court will typically prohibit certain actions without its approval, such as:

  • Sale or purchase of assets, other than in the ordinary course of business
  • Continued use of cash, accounts receivable, or other “cash collateral” which has been pledged a collateral under a loan agreement. These arrangements are quite typical. In this situation, you will need to get the lender’s consent or court approval as the first order of business. This will require showing that you can make ends meet and possibly turn a profit.
  • Hiring or paying attorneys, accountants or other professionals without getting court approval
  • Paying back salary or wages, or other debts owed when the bankruptcy is filed. This is usually part of what we call the “first day” motions.
  • Entering into new loans or secured financing agreements, such as mortgages, or new financing.

Promptly after a Chapter 11 filing, the United States Trustee will schedule a meeting with the business owners and the bankruptcy attorney. The UST will require proof that all taxes are being paid, that required insurance is in place, and will investigate whether the Chapter 11 has a reasonable chance of success.

In a Chapter 11, the business is under constant scrutiny. Accurate books and records need to be maintained. Monthly operating reports need to be filed. Many other requirements need to be met. Many deadlines to act come into play. The first 2 weeks of a bankruptcy are a very busy time and the demands on counsel and management continue after that.

Having an Exit Strategy

In a Chapter 11 bankruptcy, you have various “exit outcomes”. Given the expense of these cases, having an exit strategy up front is very important. Do you want to run the business for a short while to finish up profitable contracts or find a buyer for it as a “going concern”? Or do you want to reorganize, and exit bankruptcy with a new set of restructured debt obligations under a Reorganization Plan?

Is it worth it?

Chapter 11 bankruptcies are always far more expensive that other types of bankruptcy. Failure can leave the business and its owners worse off than if they had not filed. You need to plan and realistically assess the “cost of winning” against the expense and risk. Chapter 11 when successful can save viable businesses, pay creditors more than if the business just shut down, and save employees’ jobs. Failure can leave a pile of new debt, some of which may have to be paid by the business owners.

The Reorganization Plan

Reorganization is one Chapter 11 outcome. Basically, the debtor (business owner) works with legal counsel to put together a proposed plan to restructure business operations. The plan must be approved by creditors and by the court. As a general rule, the debtor has the exclusive right to submit a reorganization plan during the first four months after filing. This time can be and will usually be extended, but Once that period is over, creditors may propose their own reorganization plans. Creditors may also ask the court to convert the Chapter 11 to a Chapter 7. There are many tests that must be passed to get a plan confirmed. In the end, success is often a product of careful and skillful negotiation to demonstrate to creditors that they are better off with the company “alive rather than dead”

Chapter 11 is far more complex than this brief summary. But for the right business or individual it may be well worth the effort.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. To set up an appointment, call our office at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Using Bankruptcy to Close a Business

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Closing Business Operations with a Chapter 7 Bankruptcy Filing-Part One

The Personal Implications of a Business Bankruptcy Filing

Business Closed SignWhen your business is failing, and there’s no reasonable expectation of turning things around, you can simply shut your doors, but it won’t put an end to the stress and anxiety you are experiencing. The calls and letters will keep coming, and you may be named as a defendant in legal action to collect the debts of the business. Filing for bankruptcy protection can help you close down your business and minimize creditor harassment in the process. Here’s how it works.

Chapter 7 Liquidation Proceedings

With a bankruptcy, you have the opportunity to permanently discharge certain debts in exchange for allowing the bankruptcy court to sell some of your assets to reimburse your creditors. If you are a sole proprietor or operate your business as a general partnership, you will be personally liable for the debts of your business. Accordingly, if you don’t want creditors of the business to make claims against you personally for the debts of the business, you will need to file a personal Chapter 7 petition, as well as a Chapter 7 petition for your business.

Even if the business is a corporation or Limited Liability Company, very likely you will have personally signed for the business debt. If the business had a “corporate” credit card, you should assume that you, the business owner, signed the credit card applications personally as well.

When you file a bankruptcy petition, you (but not the business if it is a corporation, partnership, LLC or separate legal entity) will immediately be protected by the automatic stay in bankruptcy. The automatic stay prohibits creditors from calling, writing or taking any legal action (such as filing or advancing a lawsuit) to collect the debt from you, other than through the bankruptcy proceeding.

With a personal Chapter 7 bankruptcy filing, you must qualify by submitting to the means test created by the 2005 revisions to the bankruptcy law. This test would not apply if your personal debt obligations are primarily incurred by or for the business. Be prepared to demonstrate this to your attorney and the bankruptcy trustee.

If you want to save the business and keep it operating, a Chapter 11 reorganization is available, or if the business is a sole proprietorship (not an LLC) Chapter 13 might be available. These are more expensive, and careful attention needs to be paid to the cost and risk of failure vs the upside benefit of saving the business. More about that later.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know the personal challenges that come with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney.

For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Even the big guys are guilty of making matters worse through denial-Detroit’s bankruptcy experience is an object lesson for many others

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As you know the City of Detroit filed a Chapter 11 bankruptcy, and after a lengthy and expensive process, is emerging from Chapter 11, ostensibly with its finances in order and its future brighter. A recently reported interview with the now-retired bankruptcy judge who handled the bankruptcy suggests that in the years leading to its bankruptcy, Detroit’s city fathers fell victim to a common malady, namely desperation and denial, and that this led to expensive mistakes.

According reports of an interview given by Judge Steven Rhodes, the city made an expensive and ill-considered deal to try to fend off  the pension default that ultimately was a major impetus to its bankruptcy filing. The suggestion is that the City would have been better off had it simply bit the bullet earlier.

This syndrome of denial and “kicking the can down the road” is, in my experience, all to common, and leads to desperate and ill-considered attempts to stop the inevitable bankruptcy.

A common example is the business owner who borrows money against her home (or from the IRS by not handing over employee withholding trust funds) to keep a failing business alive. To be sure, saving a viable business and carrying it through a temporary rough patch is not a bad thing. The problem is that too often, there has been no effort to find out what is causing the problems, and no effort to deal with those problems.

Another face of this is the refusal to even consider the option of bankruptcy as an alternative until quite late in the game. Sometimes by the time this is considered, the situation has gone from bad but cureable to desperate and incurable.

Our advice to business owners is to always consider all the options, and to do so earlier rather than later. An early bankruptcy might solve critical problems that will only get worse and save the business, whereas later matters have gotten out of hand, and the once-saveable business is doomed.

Individuals are just a guilty of this. I cannot count the number of times I have seen couples  whose solution to mounting credit card debt caused by income that was not enough to cover their spending was to borrow against home equity or emptying retirement accounts.  The underlying problem is still there, and like Detroit, they are just “kicking the can down the road”

The lesson of Detroit is that financial problems do not get solved unless one gets to the source. Short term solutions, such as borrowing more money to meet a cash flow deficit, just delays the inevitable and makes matters worse.

It is never too soon for people or businesses in financial trouble to engage in careful and broad based planning. All choices and options should be considered.

Protecting Yourself and Your Company in the Face of Business Litigation

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Taking the Right Steps When You Become Involved in Business Litigation

It’s generally an unavoidable aspect of running a business — at some point, you will have a dispute with a customer, vendor or competitor that cannot be settled. When litigation is the only means to settle your differences, there are measures you should take to protect yourself.

Never ignore legal papers, and if you have been served with a Complaint, you MUST file an Answer WITH THE COURT.

Incredibly, we have seen business people whose response to a lawsuit is to call the plaintiff or their attorney, and expect that everything will all work out! They are then surprised when a judgment is entered. Calls or letters to the attorney for the other side do nothing. Whatever you do, you must file something with the court. Even if a matter is “settled” you need to file something to let the court know.

Hire Competent Legal Counsel

Regardless of how insignificant the dispute may be, you are always well served to seek advice from an experienced and competent attorney. You may be totally unaware of filing restrictions, and can risk the loss of your rights by trying to handle matters on your own.

Contact Your Insurance Carrier

It is always a good idea to review your comprehensive general liability policy or other policies to see if any provide coverage for the costs of business litigation or possible liability. Your insurer may have a duty to defend you under the policy. Even if your carrier denies coverage, you may want to seek a legal opinion regarding coverage. It costs you nothing in most cases to make a claim with the insurance carrier, but do it in writing. And do it right away.

Protect All Relevant Records

The most important step in protecting your rights is to nail down and safeguard all relevant records. If the records are hard copies or physical evidence, they should be separated and stored in a safe and secure place. This includes all electronic records or files. For these, you need to institute a litigation hold. Some of the key components of a litigation hold include:

  • Saving all electronic records and communications to a protected server or backup media, where nothing can be modified or changed
  • Creation of a secure backup with all metadata intact

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with potential business litigation. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

How creditors in bankruptcy can lose out by “sleeping on their rights”

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At recent bankruptcy conference I attended, we reviewed a lot of recent cases. These all reinforce something I have told many people over the years: when faced with a bankruptcy of someone who owes you money, delay and inaction can be a costly mistake.

Some examples: A mortgage creditor who failed to object to a modified Chapter 13 bankruptcy plan that gave the homeowners two years to sell their home and a similar period to sell their business equipment (also part of the bank’s collateral) lost the right to later seek permission to foreclose on the home through a motion for stay relief. It made no difference that before the modified plan was confirmed by the bankruptcy court, the debtors had agreed that the bank could have stay relief if they failed to meet certain payment obligations. The later approval of the modified plan controlled.

In another case, the bank had an Assignment of Rents on the debtor’s rental property that gave it the right, if the bank served notice of default, to collect the rents directly from the tenants. Although the debtors defaulted, the bank did nothing, and the debtors continued to collect the rent (while not paying the bank). The bankruptcy trustee stepped in to try to get the rents back. The court said no because the rents belonged to the bank IF they asked for them.

I had another case recently where a landlord who was owed rent by a tenant in Chapter 13 did nothing for the first few months when the tenant seemed to be resuming payment (but not paying the past due amounts which were supposed to be paid bakc under the Chapter 13 Plan). The deadline for the landlord to file a proof of claim passed without the landlord filing a claim. The debtor stopped paying rents. The landlord has probably forfeited its right to get paid anything on its back rents owed when the bankruptcy was filed.

There are many other examples I could provide. The takeaway for creditors is to start acting as soon as you learn of a bankruptcy filing, especially in Chapter 11 and Chapter 13 cases. When in doubt file a proof of claim and stay on top of what is happening. Pay attention to all notices and deadlines in them. Most importantly, creditors need to find out what the bankruptcy means for them and  develop a plan of action.

With over 30 years of experience representing creditors, trustees and debtors, we are able to help with timely and cost effective advice.

 

Post petition payments and the “New Value” defense to preference suits-Third Circuit Court of Appeals holds they do not affect the outcome

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One of the simplest ways for a defendant to defeat a preference lawsuit in bankruptcy is to show that after the defendant received the payments that the suit is trying to recover, it gave “new value” to the debtor which remained unpaid (or was paid by another avoidable payment). The defense, codified at 11 USC 547(c)(4), is intended to avoid penalizing creditors who continue to deliver value to a struggling debtor in the months leading up to bankruptcy. In essence, a creditor who, though paid, delivers new goods or value for which it remained unpaid can offset that “new” value against the amount it otherwise would have to pay back. The beauty of this defense is that the proofs are simple and the result has a mathematical certainty.

In a December 2013 ruling, the Third Circuit Court of Appeals in In re Friedmans’s Inc. held that whether “new value” was given is determined as of the Petition date, and that payments the creditor/defendant received after that date which reduced its unpaid balance are not a factor in applying the defense. The creditor, Roth Staffing, had supplied staffing services to the debtor. In the 90 days pre-bankruptcy, it had been paid $81,997 but had thereafter supplied over $100,000 in new services that were unpaid on the Petition filing date. By itself, this would be a complete defense to a preference action, since Roth had added more value than it had been paid for and as a result was worse off on the Petition date then before receiving payments. What made the case unusual is that post-petition, the debtor obtained a “Critical Vendor” order that authorized it to pay down Roth’s debt, in order to encourage Roth to keep the flow of critical staffing continuing. Under this order, Roth received another $72,413.00.

The debtor’s successor in interest filed a preference action against Roth. The issue was whether Roth had a complete defense based on the unpaid $100,000 when the bankruptcy was filed, or whether this was reduced by the $72,413 in additional payments it had received after the bankruptcy filing. The Third Circuit, affirming the District Court, held that Roth had no liability since as of the Petition date its payments received were less than the new value it had provided. In a matter of first impression on this issue, it held that the $72,413 paid post-petition was properly disregarded for purposes of the “new value” defense.

The Court supports its holding in a lengthy and interesting analysis of the preference statute and the policies behind it. For anyone facing a preference action and intending to use the “new value” defense, the case is a “must-read”.

Choosing Between Chapter 7 and Chapter 11 When Continuing a Business

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Staying in Business? What’s the Best Bankruptcy Option?

Business owners, like everyone else, sometimes make costly mistakes or experience a run of bad luck. If you find yourself and your business under a mountain of debt, bankruptcy may be a consideration. But what if you know that your problems are only temporary, that with a temporary respite from collections attempts and lawsuits, you can turn things around. What’s the best bankruptcy alternative?

The Chapter 11 Option—Reorganization

Chapter 11 reorganization is often the best option when a business can be saved as a going concern, but it threatened by debts from past mistakes or misfortune. In a Chapter 11 filing, the business owners and their attorney work with the creditors, putting together a plan that allows the business to keep operating as a new reorganized entity. The plan, when confirmed, replaces the existing debt structure with a new one usually involving extended payout and usually much lower partial payments to unsecured creditors. Getting these plans approved usually requires that a majority of the unsecured creditors holding at least 2/3 of the total value of unsecured claims have voted to approve the plan. Why would they do this? Because the debtor has offered them a better deal and a better outcome than just shutting the doors and selling all the assets. A successful Chapter 11 requires planning, good management, attention to detail, and the ability to fund the costs of reorganization. The road to success is well worn, but slippery. Having the right guide to get you through the process successfully is essential.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Choosing Between Chapter 7 and Chapter 11 When Closing Down a Business

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Closing Down Your Business? What’s Your Best Bankruptcy Option?

If your business is failing, and you see no prospect for turning it around, you may want to simply close it down now. A bankruptcy filing can help you put your losses behind you and move forward. What’s the best alternative when you know your business has no future?

Closing a small business

The Chapter 11 Option—Reorganization

A Chapter 11 filing is not generally a good choice for a business that does not plan to move forward. In a Chapter 11 proceeding, your goal is usually a reorganization plan to repay your creditors over a specific period of time. Such reorganization plans generally allow you to keep your assets and negotiate new payment arrangements if you can obtain the required creditor approval through voting.

Orderly Liquidation.

For many small businesses, an orderly liquidation is the best course of action. This process involves winding down the business. This can be done in a Chapter 11 or in anticipation of a Chapter 7 liquidation filing. It can also be done outside of bankruptcy. As we have written elsewhere, there are a multitude of traps for the unwary, and anyone pursuing this course of action should have and rely on the advice of a qualified attorney experienced in business bankruptcy or reorganization.

The Chapter 7 Option—Liquidation

In a Chapter 7 proceeding, an individual is entitled to have most debts permanently discharged in exchange for a willingness to sell all assets not exempt under state or federal laws. Corporations, limited liability companies and similar entities do not receive a discharge. They are not entitled to exempt and keep assets the way individuals are. They just get liquidated. But when a business fails or closes, the individual owners are often saddled with debts they cannot handle. More often than not, the business owners need personal bankruptcy after the business closes. In some cases, it may make sense to put the business into bankruptcy, to avoid continuing harassment by creditors or the liability that can arise from the owners’ continued involvement.

All these choices are matters you should discuss with a qualified business bankruptcy specialist. There is a way out but careful planning and the right advice are critical.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

New Jersey Bankruptcy Attorneys

We have over 30 years of experience providing sound bankruptcy counsel to businesses and individuals in southern New Jersey. Steven R. Neuner has been certified as a business bankruptcy lawyer by the American Board of Certification and has served as a bankruptcy trustee since 1993. He is a New Jersey Super Lawyer and carries a 10.0 rating with Avvo. We know from experience that every legal situation is unique.

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