In a loan context, a guarantee is a promise to pay the debt if the borrower is unable to do so.

In a business loan context, a personal guarantee is the promise of an individual, often the business owner, to pay the debt if the business is unable to do so.

Why is it important to pay attention to these personal guarantees?

Because starting and growing a small business is risky. If the startup fails, the personal guarantor is on the hook for those debts. All of the guarantor’s assets can be seized by the creditor once it obtains a judgment against the guarantor.

Why is it important to pay attention to a request that the spouse guarantee the debt?

Because when in Missouri a husband and wife own an asset together, such as a home or joint bank account, it is said to be owned as “Tenants by the Entirety” or TBE. In Illinois, TBE ownership is limited to homes owned by married couples.

TBE ownership is different than joint ownership. If two owners of an asset aren’t married, creditors of only one owner can reach that owner’s interest in the asset. With TBE ownership, however, only creditors of both owners can reach the asset. Obviously, it is to the business owner’s advantage not to have the spouse on the guarantee. This prevents the lender from seizing the jointly owned asset should the business fail.

Federal law protects a lender from demanding a spouse’s signature unless the spouse is a partner, director, or officer of the business or a shareholder or member. Regulation B, a provision of the Equal Credit Opportunity Act, provides that a lender cannot demand the signature of a spouse who is not involved in the business if the applicant qualifies for credit without the spouse’s guarantee and the spouse is not a joint applicant. Before your spouse signs any loan documents, be sure to consult with your attorney to ensure that a spousal signature is not required.

Should your business fail, and the lender tries to enforce the guarantee, your attorney should review the loan documents to determine if you have any defenses to the guarantee. For instance, a lender cannot enforce an “embedded guarantee,” in which some provision in the loan document itself states that the owner’s signature as a representative of the borrower also serves as a personal guarantee of the loan personally. These are not enforceable.

Because of the risk inherent in signing a personal guarantee, a separate individual signature underneath the terms of the guarantee is required for the guarantee to be effective. This can be either in a separate portion of the loan document or in a stand-alone guarantee document.

Can I limit my risk under a personal guarantee?

Yes, you can, to the extent that your lender will allow it. Here are some examples:

1. Ask for limits on the assets that can be reached if the guarantee is enforced. You could request that certain assets not owned as TBE be excluded, such as your home or other real estate, a savings account with your child’s money in it, or any other asset of personal importance to you.

Most retirement accounts are exempt from the reach of creditors, either by federal law or Missouri statute. Missouri also provides for an exemption of some of the equity in your home, but it is very small, and not enough to dissuade a foreclosure.

2. Ask for limits on the dollar amount of your guarantee. There are several ways to accomplish this:
   1. Offer to pay a higher interest rate in exchange for not giving a personal guarantee.
   2. Simply ask for a limit. Try to avoid open-ended guarantees. If your company is borrowing $1,000,000 and the debt is secured by collateral worth $750,000, ask that your guarantee be limited to $250,000.
   3. Ask for the amount of the guarantee to be decreased over time or when certain thresholds are passed. Over time, you hope that your business will thrive and grow. Presumably its creditworthiness will improve. Ask for a provision that reduces after two or three years of timely payments, when revenue increase above a certain value, or when its debt to asset ratio falls below a certain level.
   4. If your business has several owners, ask that your guarantee be limited to the extent of your ownership interest.
   5. Ask to simply pledge additional collateral in lieu of a guarantee. Often a business owner will offer to pledge something capable of easy liquidation, such as a Certificate of Deposit, instead of a guarantee.
3. Don’t agree to a waiver of defenses. Many guarantees call for the guarantor to waive all of their defenses to liability. Don’t do it! State and Federal laws are there for a reason. If the lender failed to follow them, then they shouldn’t be able to avoid the result of their errors.

So don’t just roll over when a lender asks for a personal guarantee, especially if the guarantor is your spouse. If you are unable to avoid guaranteeing the debt, try limiting it as suggested above. If the guarantee is called, see if you can defeat its enforceability.

Best of luck with your business!

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the March 2023 St. Louis Small Business Monthly.

Your company’s Chapter 11 bankruptcy has been filed and you’re now running your business under the provisions of the United States Bankruptcy Code.

It’s now time to work toward the ultimate goal of a Chapter 11: a Plan of Reorganization, confirmed by the court, allowing your company to restructure its debts, exit Chapter 11, and continue in business. It is important that you explain all of your concerns about all aspects of your business to your attorney and provide complete and accurate information, all before you even file the case. This will help both of you develop good ideas for successfully navigating your reorganization case and getting a plan confirmed. Advise your attorney if a new problem develops so you can consider all the potential solutions available to you.

Your next steps in planning for reorganization will include you and your attorney:

• Participating in two mandatory meetings with a U.S. bankruptcy trustee within the first 30 days after filing and begin filing monthly operating reports.
  1. “Initial debtor interview:” Learn procedural issues such as the ins and outs of filing periodic operating reports such as monthly operating reports and where and how your company can bank.
  2. Section 341 “meeting of creditors:” Be questioned under oath by the U.S. trustee’s office about your need to file Chapter 11, your plan to exit bankruptcy, how you will implement your ideas, etc. This meeting is open to all interested parties.
• Negotiating the terms of your proposed plan with the creditors’ committee if one has been formed by large unsecured creditors.
• Negotiating lease terms. Any lease which commenced prior to the filing can be “rejected.” You can then renegotiate the terms or terminate the lease, in which case the lessor’s claim will be treated as a pre-petition claim.
• Treating an equipment lease as an installment purchase agreement secured by the equipment, possibly converting a portion of the secured debt to unsecured and altering the terms of repaying the secured debt.

Although there are numerous objective standards which must be met if a plan is to be confirmed, there are objective factors as well. One of the most important of these is ‘feasibility.’ Implementation of the plan and the projected payments to creditors must be feasible. In other words, it must be reasonably likely (although not guaranteed) that the plan will work as proposed. If the basis of the plan is hope (or fantasy, as one court called it), it will not be confirmed.

You or your accountant will prepare exhibits showing projections of the company’s future profitability if the plan is confirmed and your ability to make the proposed payments. You may also want to include how labor shortages or supply chain problems might affect the feasibility of your plan and how the company could overcome them.

If your initial plan cannot be confirmed, it is not the end of the road. Your attorney (with your guidance) is free to negotiate with the objecting creditors for different treatment. If enough of these creditors accept your new proposals change their votes, your plan would then be approved.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the March 2022 St. Louis Small Business Monthly.

(c) iqoncept www.fotosearch.com

Your attorney has just filed your company’s Chapter 11 reorganization case and you have no clue what to do next. Seriously, the first thing you should do is nothing. Take a breath and keep running your business.

That’s not to say there’s nothing for you to do during the entire Chapter 11 process – there’s actually quite a lot for which you will be responsible. Any competent bankruptcy attorney already has discussed your statutory and practical responsibilities in a Chapter 11 case with you prior to filing.

Now is the time to implement those decisions made before the case was filed. If you forget a decision you made (or come across an issue you hadn’t discussed), call your attorney. The two of you should be in frequent contact during the case to be sure that you don’t take any actions which don’t make sense in the Chapter 11 context, or which might violate the Bankruptcy Code, Bankruptcy Rules, or Local Rules.

Your primary concern after the case is filed is, of course, money to operate with. That topic should be discussed thoroughly with your attorney prior to filing. Be sure your attorney discusses post-petition financing and use of ‘cash collateral’ with you. Be sure that you have post-petition financing lined up before you file, either from internal operations or from a lender. If your post-petition financing falls through, or you’re not as profitable as you expected to be after filing, you may not be able to afford to operate during the Chapter 11. If so, there is  no way for you to reorganize and your Chapter 11 case may be dismissed outright.

During Chapter 11 reorganization, you’re not allowed to pay any pre-petition debts or take any actions not within the “ordinary course of business.”  If you are concerned about an action you think would be a good idea, don’t take it without checking with your attorney and, if necessary, obtaining prior court approval.  If you haven’t discussed the concept of “critical vendors” with your attorney before the filing, you should do know do so now. Having the court deem a creditor to be “critical” allows you much more flexibility in negotiating terms for receiving necessary goods or services during the Chapter 11 case.

Be sure you’ve explained all your concerns about all aspects of your business to your attorney, providing complete and accurate information. This will help both of you come up with good ideas for successfully navigating a reorganization case. If your attorney isn’t aware of a problem, it’s hard for the attorney to address it. If a new problem develops, advise your attorney about it so you can consider all the potential solutions available to you.

Your next major responsibility is to work with your attorney and your accountant to nail down the details of your Plan of Reorganization and to get it confirmed by the bankruptcy court. That’s a good topic for another article!

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the February 2022 St. Louis Small Business Monthly.

(c) iqoncept www.fotosearch.com

The purchaser at a tax sale will likely pay much less than the property is worth. If the previous owner should file a bankruptcy case, can the bankruptcy court set aside the sale as “fraudulent,” in the sense that the property was transferred from the owner for less than the true value of the property?

In 1994, in BFP v. Resolution Trust, 511 U.S. 531, the U.S. Supreme Court ruled that properly conducted mortgage or Deed of Trust foreclosures cannot be fraudulent transfers because, although it is very rare for a foreclosure sale price to be anywhere close to a market price, notice of the sale is published and members of the public can attend the sale and purchase the property if they care to.

However, the fraudulent transfer question is much closer if the transfer is by tax sale. The notice of the sale is narrower than even a mortgage foreclosure, and the chances of the property selling for a fair value is even less.

So, can a sale or foreclosure for delinquent taxes be set aside as constructively fraudulent? This question has given rise to a split among the Circuits. The Sixth Circuit, in the recent case of Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry), 20-1712 (6th Cir. Dec. 27, 2021), found that the BFP reasoning did not apply to tax sales. This brought the circuit split even, with three circuits (the Fifth, Ninth and Tenth) finding that BFP does apply to tax sales and three circuits (the Third, Sixth and Seventh), holding that it does not.

The Bottom Line:

Property owners should be aware that real estate lost because of delinquent taxes might be recoverable by filing a bankruptcy case.

Property purchasers should be aware that they might lose the property they just purchased if the previous owner files a bankruptcy case. The Bankruptcy Code provides that debtors have two years in which to file a bankruptcy and bring a suit seeking recovery of the property.

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

If you’re a small business owner in financial distress, you’re undoubtedly looking for options for your business to have a better chance of surviving the pandemic and other economic surprises of the recent year. In the first three parts of this five-part series, we’ve looked at ideas for improving your business operations, discussed the importance of the availability of cash and improving your cash flow, and reviewed non-bankruptcy options to restructure your debts.

However, you and your attorney may conclude that none of those options meet your needs and it is time to consider a formal bankruptcy filing under the U.S. Bankruptcy Code.

Forms of Bankruptcy Relief

Before getting into details, let me make a suggestion: Don’t be too hard on yourself. It is rare for a business to fail because of only one issue. Even if your actions contributed to the problem, there were most likely other factors beyond your control involved as well. Besides, bankruptcy may provide a chance for you to fix what went wrong.

Another consideration is that the old stigma of filing a bankruptcy case has largely dissipated over the past few decades. Our Founding Fathers realized that the old European use of a debtors’ prison was unworkable and that a structured mechanism to help financially strapped people and businesses navigate a “soft landing” was needed instead. As a result, there actually is a provision in the U.S. Constitution requiring the Congress to make “uniform Laws on the subject of Bankruptcies throughout the United States.”

If you feel embarrassed about filing a bankruptcy, compare it to taking a tax deduction. It’s another example of financial relief provided by statute to individuals and businesses. It’s there for you to use, and there’s no reason to feel guilty for doing so.

The Bankruptcy Code provides for several different types of bankruptcy filings:

• Chapter 7 – A liquidating bankruptcy case, available to almost all persons.
• Chapter 9 – Specific provisions for municipalities, or subdivisions thereof.
• Chapter 11 – A reorganization case, available to almost all persons.
• Chapter 12 – Special reorganization provisions for family farmers.
• Chapter 13 – A limited reorganization, available only to natural persons and subject to certain income and debt limitations.

There are two aspects to bankruptcy relief which are common among all the chapters – the automatic stay and the opportunity for a fresh start. The automatic stay stops all creditor action against your business, providing you with a breathing spell during which you can attempt to solve the business’ problems. The fresh start provides your business with the opportunity restructure its debts into terms the business can live with.

Here’s a closer look at Chapters 7 and 11 as options for a small business owner to consider. Chapters 9 and 12 are not frequently used (unless you are a governmental agency or a farmer). A Chapter 13 bankruptcy has its own unique rules and procedures; any experienced Chapter 7 attorney should be able to counsel you on your Chapter 13 options as well.

Chapter 7 Liquidation

When most people hear the word “bankruptcy,” they think generally of a liquidation, which essentially describes a Chapter 7 filing. A trustee is appointed in every case. The trustee’s primary duty is to determine if the debtor has any assets which can be liquidated and to then distribute the liquidation proceeds to creditors pursuant to the priorities set forth in the code.

Contrary to popular misconception, a debtor does not “lose” all assets to the trustee. First, all states, including Missouri, have adopted a statutory list of assets which cannot be reached by a creditor or a bankruptcy trustee. Under Missouri statute, most common household goods are exempt (within certain limits), as are other assets such as cash, cars, and the cash value of a life insurance policy. Other assets simply never become part of the bankruptcy estate. Property owned by wife and husband as “tenants by the entirety” is the primary example of this. With certain exceptions, if a married debtor files bankruptcy and the spouse does not, property held as tenants by the entirety is not available to the trustee for liquidation in Missouri. The tenants by the entirety laws in Illinois are quite different.

Second, the trustee is interested only in assets which have sufficient value to make liquidation worthwhile. For example, the trustee would not liquidate the debtor’s home if it is worth $250,000 but has a $260,000 mortgage against it.

However, if the debtor is not able to continue making the payments on the mortgage, the house could still be lost, but it would be due to foreclosure by the lender and not because of the bankruptcy filing.

Some debtors may not qualify to file a Chapter 7 case based on a “means test” to determine if the debtor’s income exceeds certain limitations.  Such debtors may be able to file under Chapter 11 or 13 instead.

And not all debts can be discharged in a Chapter 7 case. Domestic support obligations, debts incurred by fraud, many taxes, and several other specified types of debts are nondischargeable.

Finally, corporate entities do not receive a discharge, which is why there are very few Chapter 7 business filings. Only natural persons are entitled to receive a discharge of their debts.

Chapter 11 Reorganization

Another option for a small business is a Chapter 11 reorganization. Generally, small businesses shy away from Chapter 11 because it is expensive, risky, time-consuming, and complex. However, Chapter 11 is the only bankruptcy option for a small business seeking to restructure and continue in operation if it is not a sole proprietorship.

Cases filed under Chapter 11 generally seek to reorganize the debts of the debtor, although liquidations in Chapter 11 are not uncommon. In a Chapter 11 case, the debtor generally remains in possession of its pre-petition assets (as “debtor in possession” or “DIP”) and uses them to continue operating its business during its reorganization. Relief under Chapter 11 is available to both natural and statutory entities.

Chapter 11 cases often require a number of issues to be resolved promptly, so the petition commencing the case often is accompanied by a number of “first-day” motions which seek relief on an expedited basis regarding various issues. These issues can be procedural or involve substantive relief. Several commonly filed substantive motions would include the debtor’s motions to use its assets in the ordinary course of business while the case is pending, to seek post-petition financing, and to pay its employees.

The power of the DIP to continue utilizing its assets must be tempered with a recognition of each secured creditor’s interest in those assets. The creditor is entitled to protection of those interests and compensation for any deterioration of its interest in its collateral while the case is pending.

The Bankruptcy Code provides that protection by requiring the debtor to provide “adequate protection” in the form of an “indubitable equivalent” of the creditor’s interest in the collateral, such as cash payments to the creditor and providing a replacement lien on property acquired post-petition. Other forms of adequate protection include maintaining and insuring the collateral and appropriate reporting requirements.

The general rule in a Chapter 11 case is that the debtor may not pay any pre-petition debts while the case is pending. Courts often grant exceptions to pay employees and all related payroll taxes, to honor pre-petition customer deposits, or to pay “Critical Vendors.” Critical vendors are those owed money for pre-petition goods and services necessary to the debtor’s operations and not readily available elsewhere but that will not continue to be supplied without the vendor being paid.

The primary goal of every Chapter 11 debtor is to develop a Plan of Reorganization which allows it to restructure its debts and remain in business. This may or may not include the sale of unprofitable divisions or unnecessary equipment. A debtor may reject burdensome leases of real or personal property and pay the lessor pennies on the dollar.

The debtor can reorganize its obligations to secured creditors in two very important ways.

First, if the creditor is under-secured (i.e., the value of its collateral is less than the debt owed to the creditor), the debtor can split the creditor’s claim into two different claims: the secured portion (i.e., the value of the collateral) and an unsecured portion (the remaining balance due). The unsecured portion is lumped in with all of the other unsecured claims and paid pennies on the dollar.

The debtor can then alter the terms under which the secured debt is repaid, including the interest rate, and the timing, amount, and duration of the payments. It is not uncommon for secured claims to be repaid under these more favorable terms for several years, after which the remaining balance comes due in a balloon payment. Lenders often are more willing to accept a shorter-term arrangement than something which binds them for many years.

There are many statutory requirements for confirmation of a plan, which the judge must rule upon after a hearing to consider confirmation.

Here is the important part: If confirmed, the plan acts as a new contract between the debtor and its creditors, replacing whatever arrangements existed prior to confirmation. Its terms are binding on all creditors, whether they voted for the plan or not.

Special Small Business Provisions

The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”), together with the Small Business Reorganization Act of 2019 (the “SBRA”), both of which became effective in 2020, include provisions designed to make a small business debtor’s trip through Chapter 11 less burdensome and therefore more attractive to them.

The term “small business debtor” is defined in the Bankruptcy Code to include persons engaged in business (other than debtors whose primary business is owning or operating real estate). The CARES Act increased the debt ceiling to be considered a small business debtor from the previous $2,725,625 in total debt to $7,500,000 to increase its availability to slightly larger businesses.

As with so many “improvements,” there are costs and benefits to making the election to be treated as a small business debtor.

• Only the debtor is permitted to file a plan and must do so quickly – within 90 days of filing the case.
• There will be no creditors’ committee, but a trustee will be appointed to oversee the case. Although the debtor is required to pay the trustee’s fees, a trustee who knows the ins and outs of Chapter 11 can be of great value to the debtor.
• A Chapter 11 plan can be confirmed without the support of any creditor class if certain other conditions are met.
• The ability of the debtor to recover preferential transfers has been limited. In addition to venue changes, and the debtor now is required to exercise certain due diligence prior to filing the lawsuit. Clearly, this is an improvement for creditors.

The primary benefit of the new provisions may turn out to be the mandatory appointment of an overseeing trustee. With no creditors’ committee appointed in a small business case, the trustee represents the opportunity to approve the debtor’s progress and its Plan of Reorganization and serve as a reliable source of information for the judge at status conferences or hearings.

In the next and final installment of this series, I’ll discuss the practical issues faced by a business during its trip through Chapter 11.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

(c) iqoncept www.fotosearch.com

In the first two parts of this five-part series on options for small business owners in financial distress, I suggested some ideas for improving your business operations and the availability of cash so that your small business would have a better chance of surviving the pandemic and other economic surprises of the recent year. In this Part 3, I suggest some ideas on using non-bankruptcy options in an effort to restructure your debts. We will discuss several bankruptcy options in Part 4.

Non-Bankruptcy Options for Restructuring Your Debt

1. Informal Workouts

If your business has 1) maintained good relationships with its creditors, especially its primary lenders, and 2) doesn’t have too many creditors, it may be able to work itself out of its financial troubles. Secured creditors, of course, must be treated with full respect for their security interests in the business assets. Unsecured suppliers of critical goods and services also must be treated with care, as their cooperation may be needed at some point in the future.

It is often useful to obtain an appraisal of your business assets, both real and personal, from well-respected appraisers experienced in their fields. The appraisal should value the assets at three levels: forced liquidation value, orderly liquidation value, and fair market value. These values will enable you to intelligently discuss the likelihood of collection in different situations.

Another useful action would be to hire a consultant. Sometimes business owners cannot see opportunities for improvement which are right in front of them simply because they think that the current practice works well. The consultant can help you review your company’s operating procedures, cash flow procedures, and pricing structure to look for opportunities to increase profitability.

The consultant also could prepare projections of future profitability for your business based upon the opportunities which are discovered. Armed with the collateral valuations and projections, you can show your creditors how you intend to solve your company’s problems. That is much more effective than simply asking for more time or engaging in stalling tactics.

2. Statutory Remedies

Assignments for the Benefit of Creditors (“ABC”)

An ABC involves the assignment, or transfer, of all of an individual’s or company’s assets to a third-party assignee, often in lieu of a formal Chapter 7 bankruptcy liquidation. The assignee acts as a fiduciary who is empowered to sell the debtor’s assets and distribute the proceeds to the assignor’s creditors pursuant to priorities established by state law.

Most ABCs are made pursuant to Missouri statutes. Unfortunately, those statutes were written in 1909 and have not been meaningfully revised since 1939. As a result, the ABC remedy has rarely been used in recent years, especially after the more recent U.S. Bankruptcy Code and Missouri Commercial Receivership Act have been enacted.

A proposed replacement for the old statutes has been drafted. Unfortunately, the proposal has been languishing in the state legislature since 2018. Perhaps it will be considered in 2021.

Creditors need not agree to the assignment, and there is no automatic stay prohibiting collection actions against the debtor as the statues currently are written. There currently is no provision for the discharge of the debtor’s obligations.

Additionally, creditors who do not accept the outcome of the assignment may force the debtor into bankruptcy within 120 days after the assignee was appointed or took possession.

Although Missouri’s ABC statues are still used upon occasion, the 1978 enactment of the Bankruptcy Code greatly increased the number of situations where a formal bankruptcy filing would be more favorable to either debtors or creditors, or both. This includes the automatic stay, the ability to avoid and recover preferences and fraudulent conveyances for the benefit of creditors, the ability to discharge most debts, and many other specific powers and duties.

Missouri Receiverships

A receivership, which appears facially similar to an ABC, is actually much more effective because it is a court proceeding and the receiver, unlike an assignee, is under the control of (and is responsible only to) the appointing judge. The court generally enters a lengthy order appointing the receiver, which sets out the powers and duties of all parties. As with an ABC, the purpose of the receivership is to prevent the deterioration of the debtor’s business and prepare it for liquidation.

Prior to 2016, the entire statutory guidance on Missouri receiverships was contained in only one sentence! Obviously, the lack of a more detailed statutory framework for a receiver to follow has been the cause of problems in many receiverships. Due process, for instance, was a problem. A creditor’s attorney could approach the presiding judge ex parte, explain the necessity of filing a receivership immediately, and present the judge with a draconian proposed order which often ran roughshod over the debtor’s rights.

The lack of a controlling statue has led to inconsistent appointment orders because each was unique. There was no standard list of each entity’s powers and duties. This was especially problematic if there was real estate to be sold. Title companies were extremely concerned about insuring a transaction if there was no statute granting the judge power to approve a sale proposed by the receiver.

Additionally, there was no consistent reporting or distribution process. In some receiverships, there was no allowance for the recognition of priority claims which generally would be paid before the general claims. There was no standard mechanism for disposing of funds which could not be distributed and other similar problems.

In the mid-2010s, a more comprehensive replacement of the current statute was drafted. Unlike the ABC replacement, this new statute was passed and became effective in August 2016 as the Missouri Commercial Receivership Act (MCRA).

Although MCRA provides that the prior receivership statutes and judicial precedent remain effective, it also addressed many of their deficiencies. It provides specific enumerated grounds for the appointment of a receiver. Notice to the debtor is now required before a receiver can be appointed, which creates a more level playing field. This provides the parties with time to negotiate a solution, and the debtor an opportunity to limit the receiver’s powers, file a bankruptcy, or take some other action.

MCRA provides a limited automatic stay and specifically grants the receiver powers of sale, authority to exercise certain ‘strongarm’ powers, ability to assume or reject executory contracts, and authority to seek the recovery of fraudulent conveyances under the Missouri Uniform Fraudulent Transfers Act. Notably, it does not grant the receiver authority to recover preferential transfers.

Now that we’ve looked at non-bankruptcy options, in Part 4 we will look at pros and cons of different types of bankruptcy.

This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss various bankruptcy options.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

(c) iqoncept www.fotosearch.com

Part I: Negotiations and State Statutory Remedies

Informal Workouts

If a debtor is on good terms with its creditors, especially its primary lenders, it may be able to earn itself out of its financial troubles. The secured creditors, of course, must be treated with full respect for their security interests in the assets of the debtor. Unsecured suppliers of critical goods and services also must be treated with care, as their cooperation may be needed at some point in the future.

It is often useful for a debtor to obtain an appraisal of its assets, both real and personal, from well-respected appraisers experienced in their fields. The appraisal should value the assets at three levels: forced liquidation value, orderly liquidation value, and fair market value. These values will enable the debtor to intelligently discuss the likelihood of collection in different situations.

Another useful action would be to hire a consultant. Sometimes business owners cannot see opportunities for improvement which are right in front of them, simply because they think that the current practice works well. The consultant can help the owner review the company’s operating procedures, cash flow procedures and pricing structure to look for opportunities to increase profitability.

The consultant also could prepare projections of future profitability for the company, based upon the opportunities which are discovered. Armed with the collateral valuations and projections, the owner can show the company’s creditors a plan for solving its problems.^[1] That is much more effective than simply asking for more time or engaging in stalling tactics.

Statutory Remedies

1. Assignments for the Benefit of Creditors

An Assignment for the Benefit of Creditors (“ABC”) involves the assignment, or transfer, of all of an individual’s or company’s assets to a third-party assignee, often in lieu of a formal Chapter 7 bankruptcy liquidation. The assignee, who holds legal and equitable title to the company’s assets in trust by virtue of the assignment, acts as a fiduciary who is empowered to sell the debtor’s assets and distribute the proceeds to the assignor’s creditors pursuant to priorities established by state law.

Although Missouri also recognizes the validity of a common-law assignment, most ABCs are made pursuant to Missouri’s current ABC statutes, found in Chapter 426, RSMo. Unfortunately, those statutes were written in 1909 and have not been meaningfully revised since 1939. As a result, the ABC remedy has rarely been used in recent years, especially after the more recent U.S. Bankruptcy Code and Missouri Commercial Receivership Act have been enacted.

The Missouri Bar’s Commercial Law Committee has drafted a proposed replacement for the ancient Chapter 426, which corrects some of its deficiencies. Unfortunately, the proposal has been languishing in the state legislature since 2018. Perhaps it will be considered in 2021.^[2]

An ABC is commenced when a person transfers either all assets or certain assets to an assignee. Acting as a fiduciary, the assignee liquidates the assets and distributes the proceeds pro rata to all of the assignor’s creditors.

Creditors need not agree to the assignment, and there is no automatic stay prohibiting collection actions against the debtor as the statues currently are written. However, even though a creditor can proceed against an assigning debtor for payment of its claim, the debtor, having transferred away all interest in the assets assigned, has no remaining assets from which a creditor could satisfy claims.

There is no provision in Chapter 426 providing for the discharge of the debt of the debtor. As a result, the debtor remains liable for any deficiencies remaining after the assignee makes his distributions. Although this is not a problem for a statutory person (a corporation or LLC), it is for a natural person, who may continue to earn money and accumulate assets going forward.

Additionally, creditors who do not accept the outcome of the assignment may force the debtor into bankruptcy by filing an involuntary petition within 120 days after the assignee was appointed or took possession.^[3]

Section 400.9-301(3), RSMo, grants an assignee the status of a hypothetical lien creditor from the time of the assignment, thus generally entitling the assignee to void unperfected security interests in the debtor’s property, much the same way as the “strong arm” clause of the Bankruptcy Code^[4] empowers the trustee or debtor in possession.

Although Chapter 426 is still used upon occasion, the 1978 enactment of the Bankruptcy Code^[5] greatly increased the number of situations where a formal bankruptcy filing would be more favorable to either debtors or creditors, or both. Among the various advantages are the automatic stay; the ability to avoid and recover preferences and fraudulent conveyances for the benefit of creditors; the ability to discharge most debts; and many other specific powers and duties.

2. Missouri Receiverships

A receivership, which appears similar to an ABC on its face, is actually much more effective because it is a court proceeding in which the receiver, unlike an assignee, is under the control of (and is responsible only to) the appointing judge. The court generally enters a lengthy order appointing the receiver, which sets out the powers and duties of all parties. As with an ABC, the purpose of the receivership is to prevent the deterioration of the debtor’s business and prepare it for liquidation.

Prior to 2016, this was the entire statutory guidance on Missouri receiverships: “The court … shall have power to appoint a receiver, whenever such appointment shall be deemed necessary, whose duty it shall be to keep and preserve any money or other thing deposited in court, … pending any legal or equitable proceeding concerning the same …”^[6]

Obviously, the lack of a more robust statutory framework for a receiver to follow has caused problems in many receiverships. Due process, for instance, was one such problem. A creditor’s attorney could approach the presiding judge ex parte, explain the necessity of filing a receivership immediately, and present the judge with a draconian proposed order which often ran roughshod over the debtor’s rights.

The lack of a controlling statute has led to inconsistent appointment orders because each was unique. There was no standard list of each entity’s powers and duties. This was especially problematic if there was real estate to be sold. Title companies were extremely concerned about insuring a transaction in the absence of a statute granting the judge power to approve a sale proposed by the receiver.

Additionally, there was no consistent reporting or distribution process. In some receiverships, there was no allowance for the recognition of priority claims which generally would be paid before the general claims. There was no standard mechanism for disposing of funds which could not be distributed, among other similar problems.

In the mid-2010s, the Commercial Law Committee of the Missouri Bar drafted a more comprehensive replacement of the current statute. The drafting committee included experienced debtors’- and creditors’-rights attorneys from across Missouri. There was input from courts, professors, bar associations, and title insurers. It required substantial effort from all concerned and became effective in August 2016 as the Missouri Commercial Receivership Act (MCRA).^[7]

Although MCRA provides that the prior receivership statutes and judicial precedents remain effective, it also addressed many of their deficiencies. It provides specific enumerated grounds for the appointment of a receiver, and makes the process an independent cause of action, rather than limiting it to proceedings ancillary to the relief being sought in the primary matter. The receiver may employ professionals with court permission.

Notice to the debtor is now required before a receiver can be appointed, creating a more level playing field. This provides the parties with time to negotiate a solution, and the debtor an opportunity to limit the receiver’s powers, file a bankruptcy, or take some other action.

MCRA provides a limited automatic stay, and specifically grants the receiver powers of sale, authority to exercise certain “strongarm” powers, power to assume or reject executory contracts, and to seek the recovery of fraudulent conveyances under the Missouri Uniform Fraudulent Transfers Act.^[8] It also sets out distribution priorities. Notably, it does not grant the receiver authority to recover preferential transfers.

One other significant change – a debtor may file a voluntary receivership action. There may be times when a debtor wants to avoid some of the restrictions which would be imposed on a debtor in a bankruptcy case, so it may choose to file a voluntary receivership instead.

MCRA represents a much-needed improvement to Missouri’s receivership statute, bringing the state into the modern era in this area.

Part II: Bankruptcy

If none of the options under Missouri state law, discussed in Part I, appear to meet your client’s needs, it may be time to consider a formal bankruptcy filing under the U.S. Bankruptcy Code.

Forms of Bankruptcy Relief

Before getting into the details, I will make a suggestion. While you discuss the options with your client, you may need to build up the confidence of the owner(s). The business owner likely is upset, worried, and confused about the future. They may assume the business failure was a personal failure. (Maybe it was, but.) However, it is rare for a business to fail because of only one issue. If the owner is unduly self-critical, it is harder for the business to recover. Besides, bankruptcy may provide a chance to fix what went wrong.

Also, the owner may find solace in the fact that the old stigma of filing a bankruptcy case has largely dissipated over the past few decades. Our Founding Fathers realized that the traditional European use of a debtors’ prison was unworkable and that a structured mechanism to help financially strapped people and businesses navigate a “soft landing” was needed instead. Thus, there is a provision in the Constitution requiring the Congress to make “uniform Laws on the subject of Bankruptcies throughout the United States.”^[9]

If your client feels embarrassed about filing bankruptcy, they really should not. Compare it to taking a tax deduction (another example of statutory relief provided to individuals and to business). It’s there for you to use, so there’s no reason to feel guilty for doing so.

The Bankruptcy Code provides for several different types of bankruptcy filings:^[10]

Chapter 7 – A liquidating bankruptcy case, available to almost all persons.

Chapter 9 – Specific provisions for municipalities, or subdivisions thereof.

Chapter 11 – A reorganization case, available to almost all persons.

Chapter 12 – Special reorganization provisions for family farmers.

Chapter 13 – A limited reorganization, available only to natural persons and subject to certain income and debt limitations.

There are two aspects to bankruptcy relief which are common among all the chapters – the automatic stay^[11] and the opportunity for a fresh start.^[12]

The remainder of this article will discuss only Chapters 7,11, and 13. The other two chapters are infrequently used and are too specific for a general discussion. Chapters 1, 3, and 5 of the code contain provisions applicable to all five types of cases.

Chapter 7: Liquidation

When most people hear the word “bankruptcy,” they think of a liquidation. A trustee is appointed in every case. The trustee’s primary duty is to determine if the debtor has any assets which can be liquidated,^[13] and then to distribute the liquidation proceeds to creditors pursuant to the priorities set forth in the code.

Contrary to popular misconception, a debtor does not “lose” all assets to the trustee. The Trustee is interested only in assets which have sufficient value to make liquidation worthwhile. Thus, the trustee would not liquidate the debtor’s home if it were worth $250,000 but had a $260,000 mortgage against it. (However, if the debtor could not afford to continue making the payments on the mortgage, the house still could be lost, not to the trustee, but to foreclosure.)

Only natural persons are entitled to receive a discharge of their debts, unless they are hiding assets, refusing to cooperate with the trustee, or otherwise not playing by the rules. Some debtors may not qualify for a Chapter 7 case based on a “means test”^[14] to determine if the debtor’s income exceeds certain limitations. Such debtors may be able to file under Chapter 11 or 13 instead. Corporate entities do not receive a discharge, which is why there are very few Chapter 7 business filings.

Not all debts can be discharged in a Chapter 7 case, however. Domestic Support Obligations,^[15] debts incurred by fraud, many taxes, and several other enumerated types of debts are nondischargeable.^[16]

Chapter 11: Reorganization

Another option for a small business is a Chapter 11 reorganization. Generally, small businesses shy away from Chapter 11, because it is expensive, risky, time-consuming, and complex. Chapter 11 is the only bankruptcy option, however, for a small business seeking to restructure and continue in operation if it is not a sole proprietorship.

Cases filed under Chapter 11 generally seek to reorganize the debts of the debtor, although liquidations in Chapter 11 are not uncommon. In a Chapter 11 case, the debtor generally remains in possession of its pre-petition assets (as “debtor in possession” or “DIP”) and uses them to continue operating its business as it reorganizes. Relief under Chapter 11 is available to both natural and artificial persons.

Chapter 11 cases often require a number of issues to be resolved promptly, so the petition commencing the case often is accompanied by a number of “first-day” motions which seek relief on an expedited basis regarding various issues. These issues can be procedural, such as the employment of professionals, requests to continue utilizing prepetition banking systems, and requests to set procedural guidelines for the case.

First day motions often seek substantive relief as well. Several commonly filed substantive motions would include the debtor’s motions to use its assets in the ordinary course of business while the case is pending, to seek post-petition financing, and to pay its employees.

The power of the DIP to continue utilizing its assets must be tempered with a recognition of each secured creditor’s interest in those assets. The creditor is entitled to protection of those interests and compensation for any deterioration of its interest in its collateral while the case is pending.

The Bankruptcy Code provides that a secured creditor’s interests may be protected by requiring the debtor to provide “adequate protection”^[17] in the form of an “indubitable equivalent” of its interests, such as cash payments to the creditor and providing a replacement lien on property acquired post-petition. Other forms of adequate protection include maintaining and insuring the collateral and appropriate reporting requirements.

The Bankruptcy Code provides a “ladder” of financing options for the debtor, with increasing more serious protection for the existing creditors.^[18] Debtors may obtain credit in the ordinary course of business. The debtor may also incur debt outside of the ordinary course, but only with authorization from the bankruptcy court. Both types of obligations are deemed “administrative expenses,”^[19] which are entitled to priority in payment.

If the debtor is unable to obtain unsecured credit, the court may authorize it to obtain secured credit, with priority over administrative expenses, and secured by junior liens upon property which is already encumbered, or senior liens upon unencumbered assets.

Finally, if the debtor is unable to borrow under the terms above, the court may authorize the new obligation to be secured by an equal, or even senior, lien on property which is already encumbered.

The general rule in a Chapter 11 case is that the debtor may not pay any prepetition debts while the case is pending. Courts often grant exceptions to allow for paying employees and all related payroll taxes, to honor pre-petition customer deposits, or to pay “Critical Vendors,” which are owed money for pre-petition goods and services, will not continue to supply them without being paid, and whose goods are services are necessary to the Debtor’s operations and not readily available elsewhere.

The primary goal of every Chapter 11 debtor is to develop a Plan of Reorganization which allows it to restructure its debts and remain in business. This may or may not include the sale of unprofitable divisions or the sale of unnecessary equipment. A debtor may reject burdensome leases (of real or personal property) and pay the lessor pennies on the dollar.^[20]

The debtor can reorganize its obligations to secured creditors in two very important ways. First, if the creditor is under-secured (i.e., the value of its collateral is less than the debt owed to the creditor), the debtor can split the creditor’s claim into two different claims – the secured portion (i.e., the value of the collateral) and an unsecured portion (the remaining balance due). The unsecured portion is lumped with all the other unsecured claims and paid at pennies on the dollar.

Then, the debtor can alter the terms under which the secured debt is repaid, including the interest rate, and the timing, amount, and duration of the payments. It is not uncommon for secured claims to be repaid under these more favorable terms for several years, after which the remaining balance comes due in a “balloon” payment. Lenders often are more willing to accept a shorter-term arrangement than something which binds them for many years.

The debtor is required to sort its creditors into “classes” of claims. Each creditor in a class must be similarly treated in the plan. The plan is sent to the creditors entitled to vote to accept or reject the plan. A class of creditors has accepted the plan if creditors holding at least two-thirds in amount and more than one-half in number of the creditors in that class have voted in favor of the plan.^[21]

There are other statutory requirements for confirmation, which the judge must rule upon during a hearing to consider confirmation.^[22]

If confirmed, the plan acts as a new contract between the debtor and its creditors, replacing whatever arrangements existed prior to confirmation. Its terms are binding on all creditors, whether they voted for the plan or not.

Special Small Business Provisions

The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”), together with the Small Business Reorganization Act of 2019 (the “SBRA”), both of which became effective in 2020, include provisions designed to make a small business debtor’s trip through Chapter 11 less burdensome and therefore more attractive to them.

The term Small Business Debtor is defined in the Bankruptcy Code^[23] to include persons engaged in business (other than debtors whose primary is owning or operating real estate).The CARES Act increased the debt ceiling to be considered a small business debtor, from the previous $2,725,625 in total debt to $7,500,000, in order to increase its availability to slightly larger businesses.^[24]

As with so many ‘improvements,’ there are costs and benefits to the election to be treated as a small business debtor.

• Although only the debtor is permitted to file a Plan, it must do so quickly – within 90 days of filing the case.
• Although there will be no creditors’ committee, a trustee will be appointed to oversee the case. Although the debtor is required to pay the trustee’s fees, one who knows the ins and outs of Chapter 11 could be of great value to the debtor.
• A Chapter 11 plan can be confirmed without the support of any class if certain other conditions are met.
• The ability of the debtor to recover preferential transfers has been limited. In addition to venue changes, and the debtor now is required to exercise certain due diligence prior to filing the lawsuit. Clearly, this is an improvement for creditors rather than debtors.

The primary benefit of the new provisions may turn out to be the mandatory appointment of an overseeing Trustee. Because no creditors’ committee is appointed in a small business case, the trustee represents the opportunity for “approval” of the debtor’s progress and its Plan of Reorganization and serves as a reliable source of information for the judge at status conferences or hearings.

Chapter 13 “Wage-Earner” Plan

If the business has failed, the owner may need relief from personal guarantees and other leftovers from the business. A Chapter 13 filing may help. Not all natural persons may file a Chapter 13, as it is meant more for the average person rather than the super-rich with super-sized debts.^[25]

A Chapter 13 is not a liquidating case. Rather, the debtor proposes a Chapter 13 plan which deals with all debts.^[26] The Plan runs for three to five years, and the debtor is required to make periodic payments to the Chapter 13 Trustee, who distributes the funds to creditors. The debtor is required to commit all of his future income (or such part as may be necessary) to fulfilling the terms of the plan.

There is a confirmation hearing, as in Chapter 11, at which time the plan is confirmed or denied if it does not comply will all statutory requirements.^[27] Then, if the plan is successfully concluded, the debtor receives a discharge, which is somewhat broader than under Chapter 7, as certain debts which are not dischargeable in a Chapter 7 case can be discharged in Chapter 13. There also are provisions for a limited “hardship” discharge if the debtor cannot fully perform the obligations required by the Plan.^[28]

One last note: the calculation of how much income a Chapter 13 debtor has available to pay under the plan is not based on reality. The Code mandates that you start with the debtor’s actual income and then subtract the Internal Revenue Service’s “standard expenses” for residents of the county in which the debtor resides. The resulting number is the dollar amount the debtor can statutorily afford to pay.

Of course, unless the debtor has a very low income, that number generally is larger than what the debtor can actually afford to pay. This has the effect of denying individuals for whom Chapter 13 would be the perfect sort of relief from access to that relief.

Conclusion

Common law, state law, and federal law all provide some form of assistance to the financially troubled small business. With the information contained in this article, you will be able to counsel your client generally and refer them to an insolvency attorney if needed.^[29]

Tom DeWoskin chairs the Bankruptcy and Creditor’s Rights practice group at Danna McKitrick, PC in Clayton. He has practiced in the field for more than 40 years and served on the panel of private Chapter 7 trustees for 35 of them. He is a graduate of the University of Michigan and the University of Pennsylvania School of Law.

Originally published in St. Louis Bar Journal, Winter 2021 edition

^[1] These are useful steps to take while preparing for a bankruptcy filing as well.

^[2] The proposed amendment can be found at 2020 Missouri House Bill No. 2277, Missouri One-Hundredth General Assembly, Second Regular Session 2020 MO H.B. 2277.

^[3] 11 U.S.C. § 303(b) sets out the requirements for filing an involuntary bankruptcy case.

^[4] 11 U.S.C. § 544.

^[5] 11 U.S.C. §§ 101 et seq., replacing the Bankruptcy Act of 1898.

^[6] § 515.240, RSMo 1939.

^[7] § 515.500 et seq., RSMo.

^[8] § 515.545(1)(6), RSMo. Missouri’s fraudulent conveyance statute can be found in Chapter 28, RSMo.

^[9] U.S. Const. art. I, § 8.

^[10] The limitations on who may be a debtor under each chapter may be found at 11 U.S.C. § 109. Additionally, a debtor who is a natural person must pass a “means test” to qualify for a Chapter 7 case, the details of which are set out at 11 U.S.C. § 707(b).

^[11] 11 U.S.C. § 362.

^[12] Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)

^[13] Not all property is available to the Trustee for liquidation. Missouri has chosen for its statutory exemptions to be used in lieu of the exemptions provided in the Code. § 513.427, RSMo. Most common household assets are exempt under Missouri statute, and other assets never become part of the bankruptcy estate. Property owned by wife and husband as tenants by the entirety is the primary example of this. With certain exceptions, if a married debtor files bankruptcy and the spouse doesn’t, property held as tenants by the entirety is not available to the Trustee for liquidation in Missouri. The tenants by the entirety laws in Illinois are quite different. Most Missouri exemptions can be found at § 513.430 et seq., RSMo, although there are others scattered throughout the Missouri statutes.

^[14] 11 U.S.C. § 707(b).

^[15] A Domestic Support Obligation (“DSO”) is defined in 11 U.S.C. § 101(14A) as an obligation owed to “a spouse, former spouse, or child of the debtor or such child’s parent…” which is “in the nature of alimony, maintenance, or support.”

^[16] Most types of non-dischargeable debts are set out at 11 U.S.C. § 523.

^[17] Adequate protection is defined at 11 U.S.C. § 361.

^[18] 11 U.S.C. § 364.

^[19] Types of administrative expenses can be found in 11 U.S.C. § 503(b)(1).

^[20] Moreover, the landlord’s claim is limited under 11 U.S.C. § 502(b)(6) to the remaining rent due under the lease up to one year, or 15% of the remaining term of the lease not to exceed three years.

^[21] 11 U.S.C. § 1126.

^[22] Those requirements can be found in 11 U.S.C. § 1129.

^[23] 11 U.S.C. § 101(51D).

^[24] This increase sunsets in March 2021 unless Congress acts to keep it in place.

^[25] 11 U.S.C. § 109(e). The permissible debt levels are adjusted every three years. and are set currently at $419,275 in secured debt and $1,257,850 in unsecured debt.

^[26] The required and optional provisions for a Chapter 13 Plan are set out at 11 U.S.C. § 1322.

^[27] Confirmation requirements are set out at 11 U.S.C. § 1325.

^[28] Compare the Chapter 13 discharge described at 11 U.S.C. § 1328 with the Chapter 17 discharge at 11 U.S.C. § 727.

^[29] You’re entitled to a free additional tip for actually reading the endnotes. Stress the need for your clients to consult with you sooner rather than later, so that the business still has some assets to work with, including the goodwill of its creditors. If the client waits until the bitter end to seek help, it may be too late to do anything useful.

Cash is how your business likely will get through its difficulties. Simply put, obtain as much cash as you can, and spend it sparingly.

In Part 1 of this five-part series on options for small business owners in financial distress, I suggested some ideas about improving the operation of your small business in order to survive different types of disasters. In Part 2, I’ll share some thoughts on improving your cash position and cash flow.

First, look at your business as a source of cash.

• Account receivables: Contact your customers with outstanding account receivables and encourage them to make payment. Provide discounts for prompt payment and charge interest on past due amounts if you can.
• Line of credit: If you have unused room on a line of credit, draw on it now while you still can. If things get bad enough, your lender might freeze your line and cut off further draws.
• Business loan: If you need to approach a lender for a new loan or an increase in an existing one, do your homework. No lender is going to give you money just because you ask for it.
• Business plan: Prepare a business plan or update your current plan to reflect current conditions. You may need help from your accountant, attorney, consultant or similar outside sources in order to do so. Your plan may include both a “needs” list and a “wants” list.
• How much? Determine how much money you need to implement your plan whether your business plan is to simply tread water, grow, or pivot in another direction. Break it down so your potential lender understands how it is going to save your business.
• How to pay it back? Once you have a rough number, consider how you’re going to repay it. Your business’ survival depends in part on its ability to pay its debts. Consider both the amount and duration of the likely payments.
• Avoid “hard money” lenders: When looking for lenders, be very careful to avoid “hard money” lenders and their draconian interest rates and repayment schedules. These can include factoring companies who purchase your receivables, MCA lenders who say they are “purchasing” your accounts receivable but in reality are lending against them, and other types of lenders with outrageous interest rates and impossible repayment terms.

Some of these lenders want authorization to pull a payment from the business bank account on a daily basis. You don’t know if you’ll have the required funds in your account on any given day. Your goal is to conserve cash, not to send it out to lenders.

Some lenders even want you to pre-sign a consent judgment against the company and guarantors, so they don’t have to go to any effort at all to start collecting.

My general rule is if the loan is needed to tide you over to the receipt of a big receivable or some other source of funds which definitely will be arriving soon, these are safe to consider because the loan will be in place only for a short term.

BUT if you’re intending to use this type of lender for longer term financing, I would avoid hard-money loans. Better to close the business now, on your terms, than to suffer through the turmoil of having closure thrust upon you when you become unable to meet the repayment terms.

• Investors: Another source of funds would be investors. It is important to work through your attorneys if you decide to seek investors as it is easy to violate both state and federal securities laws if you don’t do it properly.
• Self-fund or borrow from friends and family: Another option for obtaining cash is to self-fund or borrow from friends and family. Again, I urge caution, because family issues are involved, not just financial.
  • Consider what might happen if you are unable to repay the loan. What will Thanksgiving dinner be like after that?
  • Take care of yourself before you take care of your business. Make sure you have enough to live on before lending to your business. In either case, treat the loan as a real loan. There should be a real promissory note drafted, and you or your relative should take collateral if the business has any to provide.
  • And don’t raid your 401(k) or retirement IRA funds. That money cannot be reached by creditors and you may well need it to live on some day. Or, you may want to borrow against it in order to settle some personal guarantees and avoid a personal bankruptcy. Notice I said “borrow” and not “withdraw.” You will incur taxes on any amounts of your 401(k) or IRAs that you pull out of your account and there is a 10% penalty if you are under 59.5 years old. However, you may be able to avoid taxes and penalties by borrowing against your 401(k) rather than withdrawing from it. Check with someone knowledgeable about those details.
  • The same applies to your cash-value life insurance. In Missouri, cash value in a life insurance policy which you own is exempt up to $150,000. Save it for a rainy day.
• SBA Resources: The SBA has provided information on resources for small businesses at https://www.sba.gov/sites/default/files/2020-09/ResourceGuideSummerNational2020.pdf    

Once you have accumulated cash, you want to preserve it for essential business operations. There are a number options to consider and not all of them will work for everybody.

• Monitor your cash flow and forecast it monthly to be sure that your anticipated income will cover your anticipated expenses. If it won’t, contact your creditors before you are late and ask for better terms.
• Eliminate nonessential expenses as well as capital expenses. Review all of your expenses and ask yourself whether each is essential or just nice. Don’t implement expansion plans unless 1) you have the demand and 2) you can afford to cover the debt.
  • Look at capital purchases as an opportunity to improve cash flow. Have you been keeping up with the technology in your area? Perhaps some capital improvements would be in order if they would allow you to increase your production, reduce waste, or confer some other benefit on the business.
  • Can you reduce your space needs and thereby reduce your rental costs?
  • Do you have any unused or underutilized equipment you can sell? Any old inventory you could sell at a discount?
  • What about reducing your advertising or promotional expenses? Although the experts disagree, it seems to me that this generally is not a good idea, even in bad times. You need to stay in front of your customers, and you can’t do that without marketing. Especially if you have “pivoted” by modifying your product line or service, or changed how you’ve been dealing with customers, you actually might want to increase your advertising budget to let them know.
• Another idea is to make changes that don’t cost anything. For instance, consider improving your customer service department, which may require only some extra training, so you can obtain word of mouth benefits. Or maybe you need better internal accounting, which again might be accomplished through training.

Sometimes, despite your best efforts, things don’t work out. In that case, you should touch base with your insolvency attorney and discuss some non-bankruptcy methods for restructuring your debt. We’ll review some of those options in Part 3 of this series.

This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss non-bankruptcy methods for restructuring your debt.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

(c) iqoncept www.fotosearch.com

Suppose your small business has been doing fairly well over the last few months in spite of COVID-19 and the many other factors affecting our economy. However, you are worried about the upcoming change of seasons, additional shutdown orders, or other circumstances which might adversely affect it.

Or suppose you expect to do well over the holidays even in the face of (or because of) the pandemic, but dread your normally slow months of January, February, and March.

Or suppose you recently undertook a large project which fell apart and left you owing a ton of money.

Different situations require different responses.

Specific Event

If a specific event led to your problems, but your business is otherwise profitable, you may be able to work out of them.

Equipment Problems

Imagine that your business was doing so well that you bought additional equipment and hired additional employees in order to meet the demand.

Unfortunately, your new equipment didn’t work as promised. Rather than the promised six weeks, the new equipment took a year to get up and running smoothly. In addition to failing to fulfill all of your orders during this time, you paid employees overtime to produce as much as they could despite the distractions caused by the equipment problems.

Assume that you always had been fully transparent with your bank and other creditors. You also enjoy a good reputation in the industry, having always operated with integrity.

And you take a pay cut to show that you are invested in the problem.

In this situation, you might be able to pull through, largely because of the reservoir of trust and good will you have built up. Creditors may continue to work you. Vendors may continue to sell your product (perhaps with more restrictive credit terms).

In such an event, you and your attorney might be able to reorganize your business without resorting to the courts.

Customer Files for Bankruptcy

Suppose you have a large customer that files for bankruptcy. Your first move should be to call your lawyer. There are steps you must take sooner rather than later including making a reclamation claim if possible.

After receiving a notice of a bankruptcy filing, don’t just give up. If your customer stays in business, do they want to continue working with you? Do you want to continue selling to them? You may be able to negotiate better terms, including COD, no discounts or obtaining collateral in exchange for credit.

Ask your attorney if the customer has deemed you a “critical vendor.” If so, you might be able to get paid for those unpaid invoices issued for deliveries before the bankruptcy case was filed

If you receive a demand for the return of a preferential transfer, don’t just pay it and don’t just ignore it. It is worth a call to your lawyer to discuss defenses that might be available to you.

Long-term Systemic Issues, Including COVID-19

If you’re having long-term, systemic issues (and the pandemic definitely qualifies as a long-term problem), there are a number of actions you might take. Although today might be a disaster, it also is an extraordinary opportunity to make tomorrow better.

As they say, cash is king. You will need it to stay open while you make the necessary changes to survive.

Check your processes and procedures for possible increases in efficiencies or reductions in cost. Be sure that you’re not over-staffed, and that your staff is actually good at what you need them to do. There are a lot of highly qualified people looking for work these days.

Your current problems also provide you with an opportunity to change your business model.

• Don’t miss the opportunity to update your product line or your methods. Be insightful and creative. You may need to pivot and use your expertise to meet current demands.
• For instance, IBM was the undisputed leader in computer design and manufacturing during the 1960s and 70s. However, other manufacturers jumped in with smaller, faster, lighter machines and IBM didn’t keep up. Today, it is just one of a number of players in the area.
• Guess who invented the digital camera? Kodak, the former giant in the film industry! But the company wasn’t forward-looking. It felt that film would be around forever. Now look where it is.
• Look at the changes in your customer’s buying habits and refocus your business to meet them. Check out what your competitors are doing. If you’ve been largely brick and mortar, look into improving your web presence. Who would have thought that buying clothes, or even furniture, online would ever be popular? And now, in the COVID-19 era, this is even more true.
• Involve your employees – they probably know the weak spots in your business better than you do. By seeking their input, you not only obtain information, but also create a more loyal staff because they feel respected.
• Consider hiring a consultant. Owners often become blind to developing problems in their business, so a fresh set of eyes might be called for. What is the true cost to produce each item you sell? Maybe some prices need to go up; maybe some unprofitable or poorly selling items need to be dropped.

Practical example: I actually was on the receiving end of 1) an improvement in customer service which 2) cost very little to implement. I returned some specialty light bulbs from a light fixture I I had purchased several years ago because they were burning out prematurely. The customer service representative acknowledged the problem and very graciously offered to send me some replacement bulbs.

When I received them, there were a few pieces of candy in in the box in a little paper bag imprinted with “Here’s to your bright future! Thank you!”

This little touch impressed me so much that I’ve been telling others about it. What a great example of standing out in the crowd at essentially no cost.

It’s easy to be paralyzed by the rush of things going on during financial distress, but all is not lost. There are many things to consider as you respond to your particular situation whether the problem is due to a single event, a customer’s crisis, or systemic or external long-term problems.

Here’s the rest of the story: When I wrote back to the customer service rep to compliment her on the candy idea, she told me that one of the owners received candy in an order from another company several years ago and decided to use the idea himself. The moral? You can pick up good ideas anywhere if you keep your eyes open.

This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss analyzing and improving your business operations.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the April 2021 St. Louis Small Business Monthly.

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Many small business owners are suffering financially due to the effects of COVID-19 and the unpredictable, rapidly changing economy in general. In this five-part series, we will discuss the various options available to small businesses in financial trouble, all the way from working out obligations informally to Chapter 11 reorganization to going out of business.

The series will cover the following issues:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years.