Running a business can be great. However, it is always possible for a business to fall into hard times, and when it does, it can be difficult to recover. One option for businesses that are in financial trouble is chapter 11 bankruptcy.
Residential Capital LLC (ResCap) filed for bankruptcy protection on May 14, 2012. ResCap is the mortgage lending unit of Ally Financial. ResCap recently filed its chapter 11 plan, which describes how its creditors will be paid. Under the plan, junior secured noteholders will be paid in full. However, unsecured creditors will only be paid 36.3 cents on the dollar (they will receive approximately $779 million of the $2.15 billion that they are owed).
A large portion of these payouts will come from ResCap's parent company, Ally Financial. In return for a release of liability from claims by ResCap and its creditors, Ally will pay ResCap $2.1 billion.
The plan is not yet binding. First, the disclosure statement (which in this case is 399 pages) must be approved. Then, the plan needs to be voted on by creditors and approved by the bankruptcy court. So, ResCap has a ways to go before its bankruptcy is complete.
If a business is considering bankruptcy it should consult with an experienced bankruptcy attorney to go over its options. One of the biggest benefits of bankruptcy is the automatic stay, which temporarily puts a halt to almost all creditor actions, including foreclosures and lawsuits.
Source: Jonathan Stempel, Reuters, "Ally's ResCap unit files bankruptcy plan," July 5, 2013
Trying to run a business is never an easy task. But the recent economic times have made this task remarkably more difficult. It does not take many missed or late payments before creditors begin harassing a business for money owed to them. In many cases, the best way to get a business turned around and out of trouble is to file for business bankruptcy.
A California-based electric car company filed for Chapter 11 protection recently. The company, CODA Holdings, filed after poor sales. They intend to get out of the auto business permanently with this filing. The company says that it will focus post-bankruptcy efforts on an energy storage business that is also under the CODA name and uses similar technology.
At the moment, a group of debtors plans to buy the company for $25 million. The company is only four years old and only has about 40 employees.
CODA is not the first electric car company to struggle financially. Only last month, an Anaheim based company laid off almost 75 percent of their work force. This company makes electric sports cars. Another company, Tesla, has yet to make a profit and the company owes the government almost $500 million in loans.
Filing for bankruptcy can put an automatic stay on creditor actions. This includes repossessions and foreclosures. Bankruptcy can allow a business time to reorganize and reduce or eliminate penalties and fees.
Companies in any type of business can experience financial difficulty. Whether due to market changes or other commercial factors, business owners in such situations should explore the possibility of chapter 11 filing, to determine if it can help save the company.
Source: The Sacramento Bee, "Electric car maker CODA files for Chapter 11," Robert Jablon, My 1, 2013
A previous post discussed that Bob Cook, a minority owner of the Sacramento Kings, had filed for chapter 11 bankruptcy. At the time, the trustee in the bankruptcy case was pushing for a sale of Mr. Cook's minority share in the Sacramento Kings to Chris Hansen, who apparently wants to move the team to Seattle. Mr. Cook, who wants the Sacramento Kings to stay in Sacramento, was trying to find a backer to help match Mr. Hansen's offer so that he could maintain his ownership.
Unfortunately, it appears that Mr. Cook was unsuccessful in finding a backer. Chief Bankruptcy Judge Christopher Klein recently approved the sale of Mr. Cook's minority share to Mr. Hansen. Mr. Hansen agreed to buy Mr. Cook's minority share for $15.1 million, and Mr. Cook was apparently unable to match this offer.
While this is not the end for the Sacramento Kings (the sale is only for a minority interest, and the NBA Board of Governors still needs to approve it), this sale puts the Kings one step closer to leaving Sacramento. This story also highlights one of the dangers of bankruptcy: once a debtor files for bankruptcy, the debtor doesn't necessarily control what happens to his assets.
Source: Dale Kasler, The Sacramento Bee/Bellingham Herald, "Bankruptcy Judge OKs Sale of 7 Percent of Sacramento Kings to Seattle's Hansen," April 16, 2013.
Many businesses, especially smaller businesses, can feel the effects of any change in their local economy. For example, if a tourist area in California known for skiing has a long and snowy winter, the businesses in the area will thrive. It also works the opposite way. For example, if a business in a tourist area is hit by a substantial storm, the business may not be able to recover.
A company that owns clothing stores recently filed for Chapter 11 bankruptcy protection. The company cited the effects of Hurricane Sandy in its bankruptcy filing. The company hopes to continue operation of its stores through the bankruptcy process.
The retailer, Big M Inc., began restructuring in November of 2011 following the economic downturn. It closed over 20 of its stores that did not perform well, renegotiated leases and followed through on various other means to reduce costs.
The storm, which hit in late October, closed almost all of their stores in New York and two nearby states. These stores had to be closed for about a week, including the distribution center and offices. Three stores were closed for a month and are still only operated with limited hours.
In addition, the retailer has yet to receive any insurance money because of a disagreement over how much is owed to them. Overall, the fact that the company has not received insurance money and the reduction in business has left it without the funds needed to continue operating.
Filing for Chapter 11 protection can allow a business time to reorganize and restructure without the stress of creditors. Filing for bankruptcy protection stops all creditors' collection actions immediately. It also allows a business to create a debt reorganization plan that may reduce interest payments. Also, any fees or penalties may be reduced or even eliminated.
Source: The Sacramento Bee, "Retailer seeks bankruptcy protection, cites storm," Eileen AJ Connelly, Jan. 7, 2013
Chapter 11 is a form of business bankruptcy. It is a way for struggling businesses to restructure their debt and potentially continue to operate. It also protects companies from creditor actions against the company.
Recently, a palm tree farmer, Cocopah Nurseries Inc., filed for Chapter 11 bankruptcy. This filing followed an attempt to restructure the business debt without liquidating to save the business.
Cocopah Nurseries Inc. not only grows and sells palm trees but it also grows citrus fruit. Their revenue fell from $57 million in 2006 to $23 million last year. Their revenue mainly comes from the sale of trees to commercial, residential and retail developments including the San Diego Convention Center. Many of their holdings are in California.
But the recent recession has left Cocopah Nurseries Inc., and many others, in financial turmoil. Owning a business can be difficult financially at any time, but the difficulties business owners have faced in the recent economic downturn have been for some catastrophic.
Even minor changes in a business's revenue can result in payments not being made to creditors and vendors not sending needed supplies. Missing a payment to a creditor can lead to creditors initiating collections proceedings. These proceedings can be daunting for a business owner. Creditors can be seeking their payments and pressuring the owner for payments when the company does not have liquid assets.
This is where a Chapter 11 bankruptcy plan is most advantageous. Once a company files for Chapter 11 protection, all creditors collection actions must stop. This is commonly referred to as an "automatic stay." The stay stops all collection action and includes mechanic's liens and repossession actions. Filing for Chapter 11 can also help to create a debt repayment plan to allow the business to save some assets and continue operation.
Source: Wall Street Journal, "Palm Tree Farmer Files for Chapter 11," Stephanie Gleason, July 10, 2012
The Sacramento, California, area saw a decline in small business bankruptcy filings for the first quarter of 2012. Compared to the first quarter of 2011, small business filings are down 27.4 percent.
Equifax, one of the nation's top three credit reporting agencies, says that 323 small Sacramento-Arden-Arcade-Roseville regional firms filed for bankruptcy protection in the first quarter of 2012, whereas 445 filed the same period in 2011. Many other regions nationwide have seen a similar trend, and Equifax predicts that small business filings will continue to decline.
The Equifax study analyzed Chapter 7, 11 and 13 filings of commercial entities of fewer than 100 employees. While this is may be a sign that the economy is improving, many small business owners may still be struggling in the current economic environment.
Filing for bankruptcy protection affords small businesses the chance to protect the owner's personal assets while restructuring to save the company. There are several types of bankruptcy that small businesses may file, including:
- Chapter 11 bankruptcy: This filing allows the business to keep creditors at bay while working out a plan to reorganize the company
- Chapter 7: Often called a straight liquidation, a Chapter 7 is the fastest type to file, but the business is shut down and not allowed to reorganize
- Chapter 13: This filing allows a business to work out a repayment plan with some creditors (usually for secured debts) while relieving the business of other debts, depending on the amount that the business will pay back over the life of the Chapter 13 plan
For California business owners considering their options, dealing with complex bankruptcy issues may be overwhelming. However, resources are available to help determine the best path, whether it involves closing the company or reorganizing for future success. While overall trends are encouraging, circumstances that may often be beyond control can influence the decision to consider bankruptcy.
Source: The Sacramento Bee, "Small-business bankruptcies down in Sacramento region," Mark Glover, June 14, 2012