Research / Analysis # 2
Baker College

1. When reviewing the American Bankruptcy Institutes website I was researching the total number of bankruptcies in 2012, the total number of non-bankruptcies in 2012, and the total number of business bankruptcies in 2012. My findings concluded that the total number of bankruptcies in 2012 which consists of business and non-business fillings which includes the states and D.C. was 1,232,294 (ABI, 2013). The total number of non-business filings in the states and D.C. in 2012 was 1,232,294. The report shows that there were 811,789 non-business Chapter 7 filings and 352,553 non business Chapter 13 filings in 2012 (ABI, 2013). My reports also show that amongst the 57,527 business filings in 2012 that 7,760 filed for Chapter 11, 97,167 filed for chapter 7, 12,485 filed for Chapter 13, and 115 businesses filed for Chapter 15 (ABI, 2013). With the information provided we can conclude that more companies file for Chapter 7. Filing for Chapter 7 means that a business simply does not have the income to repay any portion of their debts. In this case many of the assets will have to be turned over, and this can make it hard for the business to continue to operate, and it may involve the liquidation of the business (All Law, 2013). Now chapter 13 came in second place with 12,485 filings, and with Chapter 13 this is usually the best option for businesses. There is no asset-sale in a Chapter 13, but businesses do need to demonstrate that you have a sufficient income that will allow them to repay a portion of their debts (All Law, 2013).

One way in which business can protect themselves from losses due to customers and clients filing for bankruptcy is to do a thorough credit check. Before businesses take on new clients they should have the customer fill out a credit application and verify their information with one of the major credit agencies (Lesonsky, 2013). Also check their references with other businesses they've dealt with and ask for at least three other references. If the company is just starting out, you should check the owner or owners' personal credit references, as well (Lesonsky, 2013). Another way a business can protect itself from a customer’s bankruptcy is to always sign a contract. Never do business without a contract in place that is signed by both parties. Having a contract gives the business a far better chance of receiving their money in bankruptcy court (Lesonsky, 2013). T he contract should include a clause about what happens if the party is unable to pay or declares bankruptcy. The more explicit the contract is and to the point, the more power the business will have on their side if they do end up in court (Lesonsky, 2013). Lastly the business can create an agreement that enforces security interest. A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt (Parker, 2012). It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets. Such rights vary according to the type of security interest, but in most cases, a holder of the security interest is entitled to seize, and usually sell, the property to discharge the debt that the security interest secures (Parker, 2012). A secured creditor takes a security interest to enforce its rights against collateral in case the debtor defaults on the obligation. If the debtor goes bankrupt, a secured creditor takes precedence over unsecured creditors in the distribution (Parker, 2012).

2. When I learn that my customer who owes me an unpaid debt has filed bankruptcy the first thing I do is cancel the court date, then stop contact with them completely. This is because once a person or business files for bankruptcy, you have to stop any and all collection activity (Brown, 2013). If you make contact to try to get your money back, you will violate the bankruptcy code and you can actually be sued (Brown, 2013). Even if you filed a lawsuit against the client, it gets stayed until the bankruptcy is completed. You can, however, contact the attorney or court appointed trustee to work out an arrangement on how your debt is handled in the bankruptcy Brown, 2013). The next thing I should do is perform a cost benefit analysis, this helps me to assess whether it is even worth my time and money or should I simply take the loss. In a lot of cases there is very little chance of receiving any money back. In most cases, consumers filing bankruptcy aren't going to have tangible assets that the trustee can sell and then distribute to any and all creditors. If it is worth my time, money and effort the next step would be to file a proof of claim. Check the bankruptcy filing notice to see what the deadline is to file a claim with the bankruptcy court, and detail what you are owed and why (Brown. 2013). Failure to file a claim definitely will eliminate any chance you have of getting paid. If there is any money left after the bankruptcy proceeding, the trustee appointed by the court will be charged with paying various creditors what's leftover (Brown, 2013). Proof of claim is a one-page form that you can fill out yourself; you don't need a lawyer (Brown, 2013).

3. The type of bankruptcy that would work best for the business would be Chapter 11. Chapter 11 is the “reorganization chapter” in the Bankruptcy Code. Congress has expressly stated that the public interest is best served by giving financially distressed individuals and companies a chance to reorganize their financial affairs under the supervision of the bankruptcy court. In a Chapter 11, the debtor has the initial right to propose a plan for dealing with its debts for consideration by the creditors and bankruptcy court (Vanden Bos & Chapman, 2013). Companies choose to file Chapter 11 because its long-term revenues will be higher than the liquidation value of the assets (Vanden Bos & Chapman, 2013). This way, creditors can get more money back if they allow the debtor business to reorganize and work out a payment plan (Silverman & Grabianowski, 2013). The business becomes a debtor in possession, maintaining control and ownership of their assets and continuing their regular operations. A company that declares Chapter 11 must disclose all of its assets and make a list of all the debts that it is seeking protection from (Silverman & Grabianowski, 2013). This is the creditors' right to question the debtor, a fundamental part of bankruptcy law (Silverman & Grabianowski, 2013). In cases involving millions or billions of dollars, this step alone can be incredibly complex. The creditors also meet with the debtor (Silverman & Grabianowski, 2013). A business is a good candidate for chapter 11 if they are a viable core business that can be preserved if given some breathing space from creditor collection activity. Any debtor who has assets with significant equity that will be lost to repossession or foreclosure is also a prime candidate for protection under Chapter 11 (Vanden Bos & Chapman, 2013). Once the Chapter 11 proceedings have started the business formulates a plan to reorganize its debts. This plan can be as simple as a payment plan. With larger bankruptcies, companies may take many steps to reorganize their debt (Silverman & Grabianowski, 2013). They might offer stock to some creditors. A retail business might have to close stores, lay off employees, or renegotiate union contracts (Silverman & Grabianowski, 2013). One of the major provisions of Chapter 11 allows a company to void many of its contracts, including union contracts, contracts with suppliers, and real estate leases (Silverman & Grabianowski, 2013). The business can also avoid certain payments or purchases that happened in the period prior to the bankruptcy. The usual period is 90 days, but payments or gifts made to friends, family or company insiders have a one-year limit (or longer, depending on the state where the bankruptcy is filed) (Silverman & Grabianowski, 2013). Some payments can be returned to the debtor and become subject to the terms of the reorganization plan. This keeps debtors from manipulating their assets and giving preference to certain creditors (Silverman & Grabianowski, 2013). In conclusion, Chapter 11 offers a second opportunity to reorganize and restructure the debtor's business operation. When carefully considered and adopted, a Chapter 11 proceeding can provide meaningful relief for a financially distressed business (Silverman & Grabianowski, 2013). Chapter 11 asset protection and debt reorganization plans can be powerful tools to help with bankruptcy, and can help businesses get free from their debt burdens (Silverman & Grabianowski, 2013).

References
All Law. (2013). Bankruptcy for small business owners. Retrieved from http://www.alllaw.com/articles/bankruptcy/small-business-owners.htm
American Bankruptcy Institute. (2013). December 2012 bankruptcy statistics- commercial Filings .Retrieved from http://news.abi.org/node/19582
American Bankruptcy Institute. (2013). December 2012 bankruptcy statistics- state and district. Retrieved from http://news.abi.org/node/19583
Brown, C. (2013). 11 things to do when a client files bankruptcy. Inc.com. Retrieved from http://www.inc.com/guides/2010/11/11-things-to-do-when-a-client-files-bankruptcy.html
Lesonsky, R. (2013). Protect your business against a customer bankruptcy. Retrieved from http://www.allbusiness.com/protect-customer-bankruptcy/16705385-1.html

Parker, C. (2012). What is a secured debt? Part 1 – perfected security interest. Bankruptcy

Law Network. Retrieved from http://www.bankruptcylawnetwork.com/what-is-a-

secured-debt-part-1-perfected-security-interest/

Silverman, J. & Grabianowski, E. (2013). How bankruptcy works. How Stuff Works. Retrieved from http://money.howstuffworks.com/personal-finance/debt- management/ bankruptcy2.htm
Vanden Bos & Chapman. (2013). Chapter 11 bankruptcy. Retrieved from http://www.vandenbos- chapman.com/general_bankruptcy_faqs/chapter_ 11_faqs.htm#myAnchor1