300 Richard Arrington Jr. Blvd N, Ste 503 · Birmingham, AL 35203
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More than thirty years of helping clients develop solutions to their legal problems.

Chapter 7 Business Bankruptcy

There are several different types of bankruptcy. Bankruptcy cases are divided into chapters that correspond to the Chapter numbers that provide specific applicable statutes under the Bankruptcy Code. For example, Chapter 7 bankruptcy cases arise under Chapter 7 of the Bankruptcy Code and are the type of bankruptcy most people think of when they hear the word “bankruptcy”. Chapter 7 bankruptcy cases are divided into two types; “consumer” and “nonconsumer” cases, which I refer to as business bankruptcy cases. My practice is limited to handling Chapter 7 business bankruptcy cases. These cases can take the form of a bankruptcy filing for a corporation, an LLC, a partnership or an individual who conducted his/her business outside a corporate entity. These cases most often are filed for individuals who owned or controlled a business entity that has become unable to pay its’ creditors and who are called upon by creditors to pay debts of the entity personally guaranteed by the owner . There are two primary concerns every client has when considering a Chapter 7 bankruptcy:

  1. What assets the court appointed trustee will attempt to sale, and
  2. Whether a creditor has a basis to object to their discharge.

Where I add the most value in Chapter 7 bankruptcy cases is in the initial evaluation of the client’s situation. It is critical to determine the best course of action and the most appropriate timing for filing a bankruptcy case. Sometimes bankruptcy is not the best solution - perhaps a workout with creditors is feasible and preferable. Or, sometimes it is not the ideal time to file a case, such as where a client does not possess automobile or health insurance or perhaps is without a source of income. A wise client will plan for bankruptcy in the way they order their financial affairs. There is a fine line between bankruptcy planning and what could be considered bankruptcy fraud. I’ve found that most clients create problems for themselves when they act on their own behalf without a thorough evaluation of the actions available to them and the manner in which actions should be taken. For instance, there are some creditors a Debtor can prefer and other creditors he/she may not prefer for payment. For example, most tax liability is not dischargeable in a bankruptcy case, and is a creditor assigned a fairly high priority in the distribution scheme in a bankruptcy case. It may, therefore, be wise to use available assets to pay tax liabilities that might otherwise not be discharged. However, even this general rule has exceptions both as to which taxes should be paid and the method for paying them. The devil is in the details! Also, there are certain types of assets that are exempt which need to be preserved, if not supplemented.

Examples include:

  • life insurance
  • 401k plan contributions
  • IRA contributions
  • Ordinary and necessary living expenses that occur periodically

There could even be occasions where a transfer of property may be beneficial. However, this is a ticklish proposition and should not be done without careful evaluation and thorough factual disclosure or else a client may compound their problems. Finally, there are certain debts that are specifically declared non-dischargeable in the Bankruptcy Code. Before a case is filed, a client needs to clearly understand what debts may be discharged and those that may not, to properly assess the benefits of bankruptcy. For some people these issues are not that complicated. However, for most business Debtors, their financial circumstances are pretty complicated and require substantial skill and expertise to correctly evaluate and chart the best course of action.

The second way I add significant value for business bankruptcy clients is in preparing clients for the first meeting of creditors. Every Chapter 7 case gets an assigned Trustee and it is that trustee who presides over the first meeting of all creditors. Because I have served as a trustee for over 30 years I’ve presided over many thousands of meetings which gives me the unique insight of how these proceedings typically proceed, the questions that are likely to be asked, and the perspective the trustee brings to the meeting. I’m not prescient, but certainly experienced! Every client wants to know what is going to happen in their case. While I do not have a crystal ball, I can certainly provide a very educated guess and also explain why I believe my guess is accurate. I have found this evaluation and preparation is very appreciated by my past clients and helps relieve their fears and anxiety. It really helps a client to have a sense of security to understand what is happening and why.

There are many issues that may arise in a bankruptcy case. Sometimes unexpected actions are taken by the trustee or by one or more creditors. It is comforting for clients to know their attorney has been in such situations before, often experiencing the situation from every potential side of the table. While no one can absolutely project what other people will do, it is important to know how to respond to unplanned events and to understand what the law provides and the options that are available to a client to deal with unexpected problems. Again, my experience as a trustee adds value if unplanned situations should occur.

When representing an individual or a business in a Chapter 7 bankruptcy case I typically work on a fixed fee that is required to be paid in advance. The amount of the fixed fee varies from case to case depending upon the complexity and size of the case, the special counseling needs of the client, or due to the sheer volume of documents that must be considered and evaluated to understand a client’s financial affairs and the anticipated problems and issues that are likely to arise and be addressed in the case. The fee covers the basic requirements of representing the client in the bankruptcy case, but does not include matters involving litigation such as where a discharge is contested. In the event one of these situations arise, a meeting is scheduled with the client and terms are agreed upon for the additional representation in the litigation matter.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy cases, often referred to as “reorganization,” are the types of bankruptcy you are most likely to find mentioned in the business section of your newspaper. Chapter 11 of the Bankruptcy Code is applicable to business debtors from the smallest “Mom and Pop” business to the largest corporations in the world. In a Chapter 11 bankruptcy a Debtor attempts to create a plan of reorganization where many different things can happen that will provide a new opportunity for their business to be successful, such as:

  • edefining the amounts or the terms of payment of creditors claims
  • resolving and concluding expensive pending litigation
  • adjusting the manner in which the business conducts its’ business
  • recapitalization of the business
  • selling off unprofitable aspects of a business and focusing only upon that part of the business that offers the best opportunity for success

As one might imagine, this process involves quite a bit of planning and preparation, and is by far the most complex, time consuming and difficult areas of bankruptcy practice. The rules and issues that arise in a Chapter 11 bankruptcy are so different from what goes on in the other types of bankruptcy, that a client doesn’t simply need an experienced bankruptcy attorney. Rather, such a case should not be attempted without a bankruptcy attorney experienced specifically in Chapter 11 bankruptcy cases.

The greatest value I have to offer a client considering a Chapter 11 bankruptcy case is at the initial evaluation and planning stage. The first hard question a client must ask themselves is: “Can I make money in this business?” Unless there is a reasonable degree of certainty for the prospects of success of the business, then filing a Chapter 11 bankruptcy is a waste of both money and time. It may also be possible that the business owners skill set makes him/her a solid candidate to obtain more lucrative job opportunities elsewhere. The second hard question to be answered is: “What has to occur to change the unsuccessful operation of the business into a successful operation?” Can the Debtor raise capital, are there assets that can be sold to raise money, are there viable changes that can be made to change the business into a profitable one? The third question is; “How will your key customers and suppliers react to the filing of a bankruptcy?” If your business relies significantly on warranties for work performed or products manufactured, a business in a Chapter 11 case suffers with sales because it is not the best source for a warranty of future performance. Does your business require posting bonds for performance? If so, will you be able to get a bond issued? It is imperative to have a plan before you file one of these cases! It is easy to file a Chapter 11 bankruptcy case, however, it is not so easy to change your mind or dismiss a Chapter 11 case. Too often I see cases filed that have absolutely no chance of success. Either there was no evaluation on the front end, or, the evaluation was improvidently performed. Don’t waste your time and money unless you have a genuine chance and a genuine plan of how to extract your business from the bankruptcy case by getting a plan confirmed. The entire process requires resources, imagination and creativity.

There are many questions to keep in mind when considering a Chapter 11 bankruptcy, such as:

  • Where will the business get money from which to operate?
  • Is there a security interest in the business accounts receivable and other assets from which cash might be obtained?
  • Can you be successful in obtaining an order to use cash collateral?
  • What is the status of secured debts?
  • Will you be required to, and can you successfully defend motions by such creditors seeking relief from the stay?
  • Can you devise a plan that might be deemed acceptable by creditors who will vote on the plan?
  • Do you have creditors that could logically be placed in separate classes so that you have the prospect for obtaining at least one accepting impaired class in your plan?

These are important issues that involve a lot of facts and a clear understanding of the special bankruptcy laws in Chapter 11 affecting these issues. You need an attorney who has experience and expertise. I have filed and successfully prosecuted many Chapter 11 cases to confirmation. In one case I was even able to get a plan confirmed for a business owner who was serving time in federal prison. Obviously, I am familiar with difficult situations can bring value to the creative side of developing a plan that can be confirmed.

Probate Practice

Working in the probate court became a part of my practice many years ago when my father served as one of two Probate Judges in Jefferson County, Alabama. Though I obviously could not practice in front of my father, I was still able to learn quite a bit about issues arising in the Probate Court from my father. As a result, I was called upon in my prior law firm to provide services to clients with needs in the Probate Court setting. This provided me the opportunity to develop experience and expertise concerning probate matters. Additionally, the opening of an estate in probate court creates a situation that is very similar to the work I have done as a Trustee in the Bankruptcy Court in that my client, as the lawful representative of the estate, serves in a fiduciary role who has assets to administer, procedural steps to follow in conducting the administration of the estate and often is required to perform an accounting function. I am set up to perform these types of activities or I am uniquely experienced to offer guidance in these areas where the estate representative prefers to perform these activities on their own.

One way I add value to a person considering opening a probate estate is in thee valuation stage, before anything is filed with the Probate Court. It is important to first gather information concerning the assets of the decedent to develop a clear understanding as to the assets owned by the decedent and in what legal status the assets were owned. Quite often people hold their assets jointly with others and the assets pass by operation of law without the need for opening an estate. Too often people rush in to probate a Will and open an estate only to find there was little, or no need to do so. It is also critical to understand the family dynamics before opening an estate. How the family members get along and the extent to which cooperation can be expected can substantially alter how the process should be approached and the likely cost associated with administering the estate. I try and show clients how they can organize information and the tasks they can perform themselves to enable them to help my office work efficiently in the case and to lower their legal cost.

Another manner I can add value to a client desiring to open a probate estate is from my experience handling estates myself. Managing an estate and performing the fiduciary duties that come with the job have substantial similarities to the work I have done as a Bankruptcy Trustee. This experience can be helpful to clients serving as the estate representative since we can efficiently provide services such as estate accounting because we are set up and organized to perform those services routinely. I also have an experienced and capable assistant who can perform many of the activities that must be performed in the process of opening the estate, administering the assets and closing the estate. Because of her availability, I am able to keep costs down by having much of the necessary work performed at her lower billing rate.

Finally, I provide value to clients in the handling of these estates because I am flexible about how I bill for my services. Historically, lawyers sought to be paid for work on behalf of the estate based upon the statutory scheme for compensating counsel for the estate representative at 2 ½% of the assets coming into the estate and 2 ½% of the assets paid out of the estate. In many cases this led to extremely large fees that were often out of proportion to the amount of work actually performed. Instead, I offer fixed rates for specific activities in handling the estate, or if preferred, I can bill by the hour with an emphasis on work being performed at the assistant’s rates. I have found that most estates, especially those where the family is prepared to cooperate, can be opened, administered and closed at an economical legal cost. In the matter of probate cases it is all about getting from point A to point B, and the best value an attorney can provide his client is to guide that process while also keeping the legal cost to a minimum.

Mediation

Recently, I made the decision to add mediation services to my legal practice. Clearly, mediation has become a growing field in need of individuals with specialized legal backgrounds to provide maximum effectiveness for the successful resolution of disputes. I have undergone the appropriate training and have been registered with the state to perform mediation services. I am well suited to mediate disputes in bankruptcy cases since I have participated in so many mediations over the years. Out of necessity, I have developed creative ways to settle cases to avoid running up the costs in smaller bankruptcy cases. Additionally, many people have told me that my personality, patience and demeanor make me particularly well suited for mediation work. I have made the unique decision to limit my mediation services to the bankruptcy area. This is an area where I have handled most every conceivable bankruptcy issue from most every side of the table and I am confident in my ability to help others identify ways to resolve their controversies on issues with which I am most familiar.

I have approached this decision with a keen eye toward providing value. I will perform mediation work using a sliding fee scale. For cases involving an amount in controversy of less than $100,000 I am accepting cases based upon a reduced hourly rate of $200 per hour. For cases where the amount in controversy is between $100,000 and $250,000, I will accept cases based upon a reduced hourly rate of $250 per hour. On all cases where the amount in controversy exceeds $250,000 I will charge my regular hourly rate of $300. Judges are sending more and more controversies to mediation. While every case sent to mediation deserves the time and attention of a skilled, trained mediator, not every case can afford to bear the full cost of most mediators. This sliding billing scale is a way to try and make mediation services more affordable in each case. While I have only published my intention to offer this sliding scale locally, I am available to perform mediation work in areas outside of Birmingham based upon this scale, together with appropriate travel reimbursement and minimum fee amounts.

Estate Planning and Asset Protection

My experience in handling the administration of probate estates and seeing the issues that can arise and the problems created by poorly considered plans for distribution provides me with the insight and knowledge regarding the importance of proper planning. I know that proper planning can ensure that your estate is distributed in an efficient and effective way. Whether it is a matter of coordinating the manner in which assets are owned or the use of trusts to minimize tax liabilities, I can help you reduce the chance of Will contests, avoid the prospect of creditors disrupting your distribution plan and help prevent family divisions that so often occur in the probate setting. Sometimes all that is required is an update of your Will. Other times more creative approaches are required. If you want to save your estate money and you desire the confidence in knowing that your property will be distributed in the manner you want, I can help.

Asset protection is not a new concept. However, the legal community simply seems to be speaking about it more openly these days. From my years working in the bankruptcy arena I’ve seen many situations where better planning would have significantly benefitted the family of the Debtor. If you have assets that are exposed to claims that may arise from events outside of your control, or, if you just want to be sure your assets are not vulnerable to creditor claims, proper planning may be the answer. Not only does planning for asset protection provide greater protection for your assets, it also has a secondary advantage of discouraging frivolous lawsuits by disputed claimants. Once an attorney for a claimant sees that your assets are untouchable, all enthusiasm for litigation disappears! So, not only can proper planning effectively shield your assets, it can also reduce the prospect that your assets will be attacked. Given the highly litigious inclination of our society, any person who has worked to amass considerable assets should seriously consider asset protection planning to prepare for and prevent the erosion of your assets arising from future litigation.