Here’s what to do first

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Houston lawyer Miriam Goott, who represents small businesses in their bankruptcies, likes to say to potential clients, “I hope I never see you again. This is because she made a deal with their creditors or helped them solve a problem that completely avoided bankruptcy.

“Half the time I play the role of a therapist,” she said. “What they perceive to be this huge problem usually isn’t. Usually one or maybe two creditors are really the problem.

Some lawyers predict a wave of bankruptcies in the coming months, as the economic toll of the oil fall and the pandemic creates long-term struggles for the region’s economy, according to a University of Houston Bauer College of Business forecast. In addition, the CARES Act has made it even easier for small businesses to file for bankruptcy.

Bankruptcy can provide much needed relief for small businesses, but it is more of a last resort than a first resort. The good news is that for many borrowers who are struggling to make their payments, bankruptcy may not even be necessary.

Goott focuses his practice at Walker & Patterson on consumer and small business bankruptcy.

“I don’t feel comfortable declaring bankruptcy until we know we’ve exhausted all of our options,” she said. Why? Bankruptcy can help beleaguered business owners sleep at night, but it also comes with risks.

Personal bankruptcy will have a significant impact on credit and borrowing costs in the future. Businesses need to open their books to public scrutiny, and there are reputational risks as well.

“It’s different hearing your CPA go bankrupt than maybe your barber,” Goott said. In addition, bankruptcy is expensive. Goott charges as little as $ 10,000 to $ 15,000 for a corporate Chapter 7 or liquidation, and fees can reach $ 300,000 for a complicated Chapter 11 or reorganization. Some law firms charge millions for complex corporate reorganizations.

Take stock

For a small business, the first step to avoiding bankruptcy is to take control of its financial situation. This is easier said than done, given the current uncertainty in the economy. But secured creditors are going to make projections anyway, said Patrick Hughes, bankruptcy attorney and partner at Haynes Boone in Houston.

Estimate operating costs and revenues for the next 12 week to 1 year periods, looking at the capital structure and the company’s tax obligations, he said. “What does it take to survive in the short term? Hughes said. “It’s a sobering exercise. It’s discouraging. Sometimes you realize that cuts need to be made.

A big mistake small businesses make is not paying taxes. What starts out as a business obligation quickly becomes personal liability, as owners will be held liable and even criminally liable, bankruptcy lawyers have said. Make sure you put money aside in case the business has to file for bankruptcy.

A handle on debt

The details of the loan terms are important. Go to creditors, focusing on secured creditors first.

“Your primary concern is the lifeblood of your business,” said Hughes. “If you are a trucking company, you don’t want a lender to declare a default and sue your trucks. “

Creditors can be tough guys and won’t want to work with you. But they’re more likely to take aggressive action if you’re not upfront and transparent about the state of your business, he said.

“If your lender doesn’t trust it because the debtor has turned a turtle and won’t give out information, they’re going to be more aggressive in the way they handle this,” Hughes said.

Your creditors may not be willing to negotiate. But lenders usually don’t want to foreclose on assets in a bad economy. If your business is viable and has a habit of making payments on time, generating income and attracting customers, it will work in your favor, said Hughes.

Goott frequently contacts creditors over the phone and negotiates a solution. Sometimes she tells creditors that if they don’t negotiate, the debtor will file for bankruptcy. Sometimes she just needs to let creditors know about someone’s business and the chances of collecting the debt.

One of Goott’s clients, for example, was personally liable for the company’s debts, and a former business partner managed to get a judgment in court. Goott was able to negotiate a 12-month payment plan that lowered the interest rate on the debt.

His only advice: get the agreement in writing. When you rely on a verbal agreement, creditors can change their mind. The bank clerks leave and you’re stuck with someone who doesn’t recognize the deal. Or the employee might not have the authority to offer a change in the first place.

Litigation risk

Unsecured creditors are another matter. They can sue you; they can get a judgment. In Texas, certain assets are exempt from most judgments, including owner’s residence, car, and retirement accounts. Creditors can, however, seize bank accounts. If that hasn’t happened yet, you might want to wait and see what happens, Goott said. An unsecured creditor can sell your debt to a collection agency. Or they can go bankrupt. You might never be sued.

Of course, efforts to avoid bankruptcy can be unsuccessful. If creditors simply refuse to negotiate and initiate lawsuits and the process of acquiring business assets, or even personal assets, it is possible to hand over the keys or negotiate a transfer outside of bankruptcy. You may be able to get an injunction in court, although that’s rare, Hughes said.

A bankruptcy filing can be useful because it triggers a stay – basically, the courts prevent homeowners and creditors from evicting or seizing assets while the case winds its way through the court system.

Congress passed the Small Business Reorganization Act last year, making filing easier and cheaper for small businesses. For example, business owners normally must pay creditors in full as part of a Chapter 11 reorganization to retain ownership. But Chapter 11 of a small business allows small businesses to pay less than 100% in exchange for a three to five year payout of the company’s disposable income.

No creditors committee is allowed, which helps reduce the cost of bankruptcy.

The CARES Act, which was passed in March, also raised a small business’s total debt limit (Chapter 11) from $ 2.7 million to $ 7.5 million, allowing many other businesses to qualify. “This creates a huge opportunity for small businesses to restructure their debt,” said Hughes.

Often times, bankruptcy can be avoided altogether. Goott doesn’t make money that way. But it builds trust with potential customers. “The best thing I do for (businesses) is to give them the ability to focus and focus on the problem,” she said.



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