In our April 2018 Newsletter we discussed companies managing their cash position and introduced the four phases of cash position. Once weak or negative cash flow is identified, management should begin to take action and seek guidance from financial consultants in an effort to increase cash flow. Should the company become unsuccessful in increasing its cash flow to provide for operational costs or become unable to pay its debts in a timely manner, the company has entered the last phase of cash position, Insolvency. Once a company reaches insolvency, it is essential that management work to involve counsel and a strong insolvency financial consultant as quickly as possible to discuss and explore any and all options available to the company.
The federal bankruptcy laws in the United States offer many resources and paths for insolvent companies to reorganize its debts, sell its assets, and dissolve the business. The bankruptcy process automatically provides a debtor relief from creditor demands and collection action so that management can weigh their options and determine the best course of action for all parties involved. Creditors are prevented from using abusive and last-minute techniques to make back their money and jump ahead of anyone else involved with the matter to get paid.
Filing a Chapter 7 bankruptcy results in the appointment of a trustee that will work to liquidate the company’s assets. Once the assets are liquidated to cash, the trustee will distribute the cash to creditors. Typically, the debts exceed the value of the assets of the company. When coupled with the liquidation costs of the bankruptcy, often unsecured creditors receive significantly less than the amount of the debt or nothing at all. In general, individuals and small business owners find that a Chapter 7 process provides the desperately needed relief from a very stressful and often overwhelming financial burden.
While more expensive, a Chapter 11 filing will provide an opportunity for a company to work alongside its creditors to restructure its debts, negotiate executory contracts, and work out a plan to emerge from bankruptcy as a continuing business. It can also be used to provide an orderly liquidation where the Debtor has more control over the process than in a chapter 7 where a trustee is automatically appointed. In a Chapter 11, the debtor, its advisors, and creditors work together to renegotiate the terms of debt, often resulting in less immediate cash burden for the debtor and, ultimately, a higher recovery for the creditors than would result from a liquidation. After creditors agree to a plan of reorganization, the debtor can emerge better off and continue to do business.
STAY TUNED FOR OUR NEWSLETTER REGARDING CREDITORS WITHIN A BANKRUPTCY _________________________________________________________________________________________
Need financial guidance? Whether your company is approaching insolvency, or already there, Grobstein Teeple LLP can assist you through bankruptcy process. We will ensure your business complies with the financial reporting obligations of a debtor. We also provide accounting services to trustees of Chapter 7 and Chapter 11 estates. Contact Kailey Wright, principal of Grobstein Teeple LLP, for further information. We look forward to assisting you.Kailey Wright