With the US government wrapping up its pandemic financial support for businesses and the specter of an economic recession still hanging over the economy, experts expect an uptick in business insolvencies and bankruptcies. Debtor-creditor relations is a complicated matter for any business, and having an expert legal team is necessary to ensure entrepreneurs and organizations are able to navigate this landscape with all parties arriving at a satisfactory outcome.
According to David R. Haberbush, principal of Haberbush, LLP, there are many reasons why businesses go bankrupt. It's predominantly, if not exclusively, some form of mismanagement, and one of the keys is identifying where those weaknesses in management are, addressing those weaknesses, and fashioning a plan to either deal with, correct, or replace those deficiencies.
He adds that one of the most common reasons for bankruptcy is a business Being under capitalized for the business that they're undertaking. In other words, they might have a good product, but they don't have the financial horsepower to meet the demand for the orders, so they end up in trouble.
Haberbush says that a heavily financially troubled business can choose among two paths to take, depending on the dynamic and issues it is encountering. If the business cannot be salvaged, then it will go into what's called a Chapter 7 bankruptcy, which is a liquidation. The court will appoint a trustee to oversee that liquidation and ultimately distribute the funds to creditors after reviewing their claims and making sure that they're valid. While liquidation can be a fairly straightforward process, there are instances where it can take several months to collect accounts receivable or deal with inventory.
If declaring bankruptcy does not make sense, which is not an unusual thing for a business, Haberbush will help wind it down, and the entity will be dissolved without the intervention of a court.
The other path is Chapter 11 bankruptcy, or reorganization, where non-productive assets are discarded. These include leases and other liabilities that drag the company down and need to be rejected or terminated. In this type of bankruptcy, the debtor usually proposes a restructuring plan around its core assets, which is approved by the court. This will keep its business alive and allow it to gradually pay its creditors.
Haberbush says bankruptcy, especially Chapter 11, is a highly regulated and tightly supervised process. There is the Bankruptcy Court itself, as well as a regulatory agency that's a subdivision of the United States Attorney General, called the United States Trustee Program, which is the regulatory body responsible for overseeing these cases. During the process, there are significant monthly financial reporting requirements, with a purpose of having transparency in conducting business and to assure that there's no fraud or other problems going on during the bankruptcy process.
“I go to great lengths to explain to the client what those regulations are, how those regulations are implemented, and what their responsibilities are. I explain to them that we can help them reorganize their business, but it is a painful process in terms of the amount of effort required of the management in order to comply with the regulatory side,” Haberbush says.
Haberbush states that the type of bankruptcy that is best for a troubled business is not one-size-fits-all, as each situation is unique, and having high-quality legal advice is important to determine the best cost of action.
“I prefer to see businesses survive, but I'm also a realist and know that not all businesses can be saved,” he says. “For entrepreneurs, your success really depends on your ability to run your business and the professionals you retain to assist you. I understand that entrepreneurs can be very optimistic, and when they get in trouble, they rely on positive thinking to carry them through their problems. There's nothing wrong with optimism, and we all need a healthy dash of that. But it also needs to be tempered with a measure of realism.”
Finally, Haberbush says that bankruptcy is not a death sentence for someone’s entrepreneurial dreams. Instead, it can be seen as a fresh start where they can correct their mistakes.
“I often encourage business owners and tell them that these things can be fixed, and this may mean they have to take responsibility for how they got to where they are. But, that doesn't mean that they are losers or failures. I've seen people get themselves into a world of problems and undergo bankruptcy, and emerge later as successful entrepreneurs,” he says.
Media contact:
Name: David Haberbush
Email:[email protected]
