Many businesses in the US today are struggling from day to day and barely treading water. In many of these situations, the owners may have solid business plans and profitable ideas. But, the single most important ingredient for surviving in business is cash flow. Regardless of how awesome a business opportunity is, if there is not sufficient cash flow to maintain operations, failure is looming. So when the debts mount and the IRS and secured creditors start trying to take assets, many companies head for the security offered by the bankruptcy laws. But, the price paid to get this protection is very heavy. As a CPA, I have been involved with assisting a number of clients that have fought their way through Chapter 11 Bankruptcy - some successfully, some not so much. I would like to offer some points to consider for any business that is considering this route.
Whoever first applied the term "Tar Baby" to bankruptcy must have been a genius. This is the perfect description for what happens the second after the case is filed. Right out of the gate, the court demands the reporting of all assets and liabilities. In addition, all cash accounts are required to be closed and new "Debtor-In-Possession" bank accounts are required to be opened. The office of the US Trustee is placed in the position of monitoring every deposit and payment made by the debtor. The US Trustee also monitors all operations and requires continual explanations of any variations and changes in standard operations.
The closing of accounts can pose a problem for many creditors. For instance, all tax payments and auto-draft transactions must be changed. Also, all prior check stocks must be destroyed to avoid "accidentally" using those accounts. This is a very critical step. The Trustee's office will jump down a debtors throat if they continue to use pre-petition bank accounts. In fact, this is one of the fastest ways to generate a motion to convert a case to a Chapter 7 liquidation. When the new accounts are established, a debtor must submit all account information, including blank check stock copies, to the Trustee. In addition, it is critical to only open post-petition accounts with banks which are approved as debtor-in-possession account holders by the Trustee's office. Also, a debtor needs to periodically check with the banks to ensure their continued participation. In one case, a client of mine was notified by the Trustee's office that a motion to convert the case was on the table due to the use of an unauthorized bank. However, the bank had been used for almost 10 months. But, the Trustee's office had requested re-authorization by the banks, and the bank used by the client had decided to not continue to handle debtors-in-possession. The account was closed and a new bank was chosen and information was provided to the Trustee along with a very detailed explanation of how the debtor had used the unauthorized bank inadvertently. The motion to convert was withdrawn. But, a lot of effort went into avoiding the conversion which could possibly have been avoided by periodically checking with the bank to see if they intended to continue to participate.
The next most important issues is the monthly reporting. This reporting must be made timely. It is a lot easier to explain differences shown on the reports or adjustments from prior reports if the reports are not submitted late. The Trustee's office supplies debtors with the forms required to be submitted. These forms include Balance Sheets, Income Statements, Proofs of Cash, cash disbursements, cash receipts, insurance in force, accounts payable, accounts receivable, bank reconciliations, bank statements, and a narrative of any important issues affecting the operations of the debtor. In the past, I have taken these forms and created Excel spreadsheets of these forms. This allows for a faster preparation because much of the information carries from month to month. Often only the month the report covers has to be changed. Also, the Balance Sheet and Income information can be entered and the totals are calculated and carried from month-to-month. Before submitting an initial report, a debtor could review reports from other Chapter 11 filers. The PACER Service Center provides all court information which has been formally entered into Federal court proceedings. After registering, a debtor can select the appropriate bankruptcy court and view or print all submitted documents, motions, or court orders. The only requirement for viewing is knowing either the debtor's name or case number. If a debtor can get the name or case number of another filer, the reports from that filer can be printed for comparison as to the information required to be submitted. There is an $.08 charge for each page viewed/printed. PACER is also a great resource for tracking if motions or orders have been signed and the dates of those signatures.
Finally, it is very important to be as upfront and honest about the financial situation and the plans to move forward from bankruptcy. The judge and trustee both understand that severe financial problems have resulted in the bankruptcy. If things were all roses and sugar, the debtor wouldn't be where they are. The simply want the debtor to show that they have a really feasible plan to move forward and pay the necessary debts as part of the plan. Trust me - the judge will know when you are feeding a line. And, the judge will be more likely to support the case and go the extra mile if he/she trust the debtor.
Chapter 11 is not a fun place to be. It should not be entered into lightly. But, with a lot of work and effort, a debtor can maneuver through to plan confirmation and pay-out. Good luck to anyone who finds themselves in Chapter 11. We feel your pain!