How Chapter 11 Can Save Your Financial Life

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I have met with so many clients and seen so very many different types of situations, but a common component in virtually all of them is that there is some judgment, some expensive property, or some expensive equipment which makes the monthly budget very difficult to satisfy and very difficult to maintain on a positive cash flow basis. The key to a successful business is that it can successfully pay for itself each and every month, including paying ownership an appropriate ownership or management compensation. Where monthly costs have become too high, continued effective ownership and management becomes impossible. This is where Chapter 11 can assist a property or business owner to get control of his overall costs to maintain his/her business and maintain his/her employees.


(1) Impending Judgement: I have spoken with a number of people who tell me that a creditor has just sued them for a huge judgment. If the creditor is allowed to pursue collection of this judgment, the business will certainly fail. This is one of the valid reasons for filing Chapter 11.


It is best to file a Chapter 11 case prior to a judgment actually being taken. If it has already been filed, you simply don’t want to allow a lawsuit to proceed in court to a default judgment. It is best to file an answer where you deny the allegations within the complaint, force the creditor to prove its case where there are any facts whatsoever in issue, and file any defenses to the lawsuit (called “affirmative defenses”). The bottom line here is that you don’t allow any creditor to freely and easily take any judgment against you (large or small) that can jeopardize your personal or business economy. Once a creditor takes a judgment against you or your company, you lose control of the legal process and collection procedures can be very unpleasant.


The great news is that the filing of a Chapter 11 case will stop any lawsuit in its tracks. Once you file and serve the bankruptcy petition upon the creditor, the creditor must stop pursuing the action. At this point, you can categorize the type of judgment within your bankruptcy petition as a certain type of debt (secured or unsecured) and can start moving forward with the generation of a formal Chapter 11 Plan where you seek to pay off this debt on an affordable basis for you personally or for your business.


If the creditor has already procured a judgment, you need to get to me quickly to discuss when this judgment was taken. There is an early point in the process after the judgment is taken that it may be classified as a general unsecured debt in your Chapter 11 case. At a certain period of time, it will become secured which will make it more difficult to pay in the Plan.


(2) Expensive Contract: When I speak about this, I think about a particular case I worked on where my client maintained two offices–a very expensive office in Beverly Hills and another one in the much less expensive Inland Expire. The very expensive office was producing a very small % of the client’s business in relation to the income produced. As a result, we opted to “surrender” the lease the business had for its Beverly Hills location. This meant that the business overhead was decreased about $15,000. per month. This $15,000./month was a major component of the business’ excess expense. The case was successfully confirmed by the Court and the client was able to maintain his business with its singular, very lucrative location.


(3) Expensive Lease: In a recent case, I represented a national printing company which had purchased two expensive printing presses for $3.1 million. When business slumped, it was not able to pay for both presses. In the Chapter 11, I was able to reduce the valuation of each printer to roughly $600,000. by Court Order and agreed again by Court Order to surrender one of the presses back to the leasing company. As a result, my client was able to maintain its business operations with a single press and much lower monthly payments for the single press at a lower monthly interest rate.


(4) Expensive Property: In virtually every Chapter 11 case I consider, I look at the valuation of the business or rental property and compare it to today’s fair market value for that property. In a recent case, for example, my client owned a business property where it maintained a school to license California beauticians. Part of the problem was the terrible back due status of the loan and the high loan balance. After negotiating with the bank, I was able to reduce the loan balance from $1,525,000. to $1,170,000. with a complete elimination of all back due mortgage payments in the calculation. Now, the client was able to maintain ownership at a much lower, much more affordable loan balance going forward.


I provide some more explanation above of how I review, consider, and work out Chapter 11 cases in my clients’ favor. I look forward to speaking with you to see how I can help you to keep your properties and keep your businesses going forward. Call me for a free 1/2 hour initial consultation. I look forward to hearing from you.