What is Bankruptcy? - Short

Topics:

• Chapter 11 vs. Chapter 7
• Costs and immediate impact
• How long bankruptcy lasts
• When to file

Guest: Stephen B. Ravin — Saul Ewing LLP

This is an abridged version of the original episode. Feel free to go back and listen to the full version in our show feed.

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Transcript

SPEAKER_00 0:01

You are listening to Corporate Bankruptcy A to Z, a podcast that gives you the ins and outs of corporate bankruptcy. This is an abbreviated release of episode 1, where we will cover the differences between Chapter 11 and Chapter 7, the cost of bankruptcy, immediate changes to the company, how long the company can expect to stay in bankruptcy, and the best time to file. If you are new to the show or want to hear the full conversation about this topic and more, we invite you to check out our full bankruptcy series found below in the show feed. There you will find an unedited version of each episode where we dig deeper and answer more questions. Corporate Bankruptcy A to Z is hosted by Neil Goldstein, a chief restructuring officer with over 30 years experience. He's joined by co-host and legal expert Steve Raven of Sol UI, a bankruptcy attorney with over 40 years in the field. If you are dealing with a situation now and need guidance, you can reach out to them directly. Call Neil at 940-808-9451 and Steve at 973-286-6713.

SPEAKER_02 1:10

A Chapter 7 is a cessation of operations by definition. The business stops operating, a trustee is appointed, and the trustee liquidates the assets of the entity. Whereas a chapter 11 contemplates what's called a reorganization, whereby the company continues operating. However, the debts are frozen, and the company is given an opportunity to, well, number one, continue operating, and number two, uh restructure its debt and reorganize itself.

SPEAKER_01 1:48

When you say the trustee takes over in a chapter 7, sells the assets, what happens to that money?

SPEAKER_02 1:58

Well, the money is to be used to pay the debts of the entity.

SPEAKER_01 2:10

Is that true?

SPEAKER_02 2:11

It's very unusual that the owners will get any proceeds. So it's it's highly unusual uh that that happens.

SPEAKER_01 2:29

So it sounds like we should focus our attention on the Chapter 11, which is the continuation of the business. With that in mind, uh is the bankruptcy process an expensive one? And if so, who pays?

SPEAKER_02 2:42

Well, the bankruptcy process is an expensive one, especially Chapter 11. Uh, it's very professional heavy. The debtor, which is the company filing Chapter 11, will have attorneys and accountants. So, in that sense, it's very expensive. In fact, in most cases, it's prohibitively expensive. There's really no way to estimate. I mean, uh, if I had to pick numbers, I would say uh for the smallest of Chapter 11s, $50,000 to $75,000, and anywhere up from there to tens of millions, depending upon the company.

SPEAKER_01 3:24

Is Chapter 11 the only option for a company that would allow them to stay in business, or was there another alternative to a bankruptcy filing?

SPEAKER_02 3:34

Uh well, there are alternatives to chapter 11, one of which you mentioned before, chapter 7, which is under the bankruptcy code. It's a liquidation of assets. If a company is desirous of staying in business but not filing bankruptcy, uh, the only other option is what's called an out-of-court workout. It's it's a lot less expensive than a bankruptcy, and it it uh can accomplish the same thing if the creditors are on board. From a big picture, it accomplishes the same thing as a chapter 11, but in a very different pathway. The bankruptcy is in the bankruptcy court, and the out-of-court restructuring is in no court. It's just it's informal, it's a lot less expensive, and there's no rules, in essence, except for the rule of fairness.

SPEAKER_01 4:32

Steve, once a company decides to file for bankruptcy, what do they do first?

SPEAKER_02 4:38

Well, there's no such thing as first, uh, except for paying their lawyers. Everything after that basically has to happen, or I should say there's many things that have to happen at the same time. They're all equally important in those early days, not only early days of a bankruptcy, but pre-bankruptcy planning is very important. The more planning you can do, the better you are at hitting the ground running, and things will go a bit more smoothly, theoretically. But some of the key issues at that time are to have conversations with the bank so that they know what's happening, and they're gonna have to fund the Chapter 11, which is why you should talk to them in advance. Another important first day thing is speaking to the employees, uh, because they're gonna be freaked out, and they have to know and should know from the owner of the company that the company is or has just filed Chapter 11, um, and what's in store and what the plan is, so to speak. Uh, in addition to which the company would want to speak to its customers because the word spreads very quickly, and the company, the chapter eleven debtor, would prefer or should prefer to to have the customers not lose confidence.

SPEAKER_01 6:15

What should management know about any immediate changes that would occur to company operations when they file the most immediate and obvious change could be a trimming down of the employment force.

SPEAKER_02 6:34

Uh I mean the name of the game is to save money in a chapter eleven, and firing people is maybe a low-hanging fruit way to do that, in addition to which, generally speaking, expenses of the company will have to be cut back. It's a trimming of the fat. So that's something that the employees should expect, or management should expect, in addition to working harder, and uh, you know, uh assuming everybody's on the same team of wanting the company to survive, uh it's gonna be a lot of heartache to get to that point.

SPEAKER_01 7:22

Lawyers often refer to a company filing for bankruptcy protection. Who is protected in the process and how?

SPEAKER_02 7:30

In essence, it's uh protection of the company from its creditors. Because what happens, and this is another term that's often used, but people don't know really what it means, is the automatic stay. Creditor activity, the pursuit of collection, whether it's uh lawsuits in courts or or even collection letters, that automatically stops. It's like the curtain comes down automatically. Creditors are prohibited from uh continuing any sort of collection activity. That's the automatic stay, and that's what the protection means. It's protection from the creditors.

SPEAKER_01 8:18

Does a company stay under bankruptcy protection forever, or does it exit and return to business as usual?

SPEAKER_02 8:25

It's not an overnight sensation. It it usually takes, I would say, the typical Chapter 11 on the average, is about uh six to nine months long. And the exit point, the the goal of a company in Chapter 11 is to file and have approved by the court what's called a plan of reorganization, which is the document which advises the creditors and the court uh what the plan is to come out of chapter 11.

SPEAKER_01 9:00

What are the chances a company can become successful after a filing?

SPEAKER_02 9:06

Well, you know, these days, as opposed to let's say 20 years ago, there are more companies that liquidate in chapter 11, which includes a sale of the assets to another party. And the Chapter 11 reorganization is built around that sale, as opposed to what it used to be 20 years ago, 30 years ago, where a company would reorganize its itself and pay its creditors X cents on a dollar and survive. These days it's more or or I should say many times fewer actual reorganizations of the company with management in place.

SPEAKER_01 9:59

It sounds like there is a more appropriate time to file. Is that true with the close of a physical year or when cash in the bank is high or low?

SPEAKER_02 10:10

Well, cash is typically scarce in a chat when a company is at the point of filing chapter 11, but cash is critical. Uh, it's the old expression cash is king, because when a company files Chapter 11, for the most part, their suppliers will only supply them on a COD basis. They're not going to give them credit, especially when most of them are owed money, which that those debts are frozen. So the more cash a company has, the better it will be able to manage itself. So if I had to choose, if I were a retail business and I had to choose between filing three weeks before Christmas or a week after Christmas, I would file a week after Christmas when I theoretically had all this money in the bank.

SPEAKER_01 11:04

Steve, I'm coming up to my favorite question. And it is can a company wait too long to file?

SPEAKER_02 11:12

My experience is that nine companies out of ten wait too long, or at least I should say, things would have gone a lot better had they filed bankruptcy earlier. Uh the problems would have been less severe, and again, this is just the typical case. Uh they theoretically would have had more money, they would have had better relationships with their creditors. I mean, they have more options when it's early in the game as opposed to when it's late in the game. If the company hasn't paid taxes and the tax man is coming down the street to lock the doors, and the company files bankruptcy five minutes early, the automatic stay, by the way, does stop the tax man from locking the doors. But the company is in such a frenzy, it just makes it a lot more difficult to survive in a chapter 11 because they waited so long.

SPEAKER_00 12:14

Do you have a question about bankruptcy? Why not ask the experts? Emails for Neil and Steve can be found in the show notes below, and remember, the first call is always free. Call Neil at 940-808-9451 and Steve at 973-286-6713. You can also find more resources on our websites. Go to corporatebankcy a to Z.com or elementary business.com. You can also find links to those in the show notes down below. Corporate Bankruptcy A to Z podcast and YouTube channel are produced by me, Sir Isaac Smith. Be sure you subscribe and share the episode, and we will see you next time.