Deciding Between Bankruptcy & A Workout

Trying to decide whether to file for bankruptcy or attempt to negotiate an out of court “workout” could have been the situation the person who coined the term “stuck between a rock and a hard place” was in. There is no right answer when one is in such a position, and moving forward is guaranteed to be painful.

Let’s Back Up A Minute

Many people think that declaring bankruptcy is the only way to get out of a tough financial situation, but that is simply not the case. Many businesses are able to avoid bankruptcy by negotiating new deals with their existing creditors. The renegotiated deal is called a workout.

Creditors are often willing to enter into a workout agreement because they know that the alternative is having a debtor file for bankruptcy. In the post-financial crisis world, lenders and other creditors (like suppliers) are very familiar with bankruptcies. They know that having just one business in a chain of production file for bankruptcy can bring down a larger group of businesses connected to it, or even a whole industry. These creditors don’t want to risk the health of their own business or industry, so they are willing to be flexible.

Pros and Cons of a Workout

A workout can be a great solution, because they can be done quickly, cheaply, and discretely. But they are not the right choice for every business.

In order for a workout to provide long-term relief, the business must have enough cash flow to keep the business running in the short-term, and a plan to pay back debts in the long-term. Simply pushing bankruptcy off to a later date does not serve the interests of any of the parties involved, and is not what a successful workout should do.

The business must also have a really good understanding of what debts are currently owed, and what is coming due in the future. Once again, delaying an inevitable bankruptcy is not what a workout is for.

Pros and Cons of Filing for Bankruptcy

If a debtor lacks liquidity, or has a lot of creditors, filing for bankruptcy may be a more realistic path forward. Bankruptcies are disruptive, but what happens after an initial filing is relatively predictable, making it easy for the debtor and all the creditors to move forward.

From the debtor’s point of view, filing for bankruptcy provides a bit of breathing room that can be used to get back on one’s feet since creditors cannot collect any debts after a filing until the court gives the okay.

Bankruptcies are known for their ability to give debtors a clean slate, but they can also be good for creditors and those looking to buy business assets at a lower cost. Filing for bankruptcy removes liens and other on a debtor’s assets, making them attractive to buyers.

Bankruptcies are by their very nature transformative experiences. The business that goes into bankruptcy is never the same business than emerges.

There Is No Right Answer

When a business is in dire financial straits, it is very unlikely that a clear path forward that has no downsides will magically appear. Oftentimes none of the options available are great. With good advice, sound planning, and a bit of luck, whatever path a business owner chooses will lead in a good direction.  

The Other Side of the Story

There are two sides to every story, including those involving bankruptcy. We talk a lot about the work we do for those who are filing for bankruptcy, but we also do quite a bit of work for creditors. In fact, we should probably talk more about this work because we think it is one of the things that makes us one of the best bankruptcy firms in Wisconsin. Working on both sides of the bankruptcy process means we can be better advocates for our clients because we know the other side of the story.

Our Work for Commercial Lenders

Our firm does a lot of work for commercial lenders. We review contracts to make sure that investments will not be completely lost if a deal goes bad, and we help lenders navigate the bankruptcy process when they are owed money by a debtor that has filed for bankruptcy protection.

When one person or business files for bankruptcy it can set off a chain reaction that destabilizes many businesses. We try to minimize the impact a bankruptcy filing has on our clients by encouraging them to make sure that all the loans they make are secured, even if the applicable collateral is unusual.

We also negotiate a lot of workouts. A workout is essentially a renegotiation of an outstanding debt. Being flexible about when payments are due or what interest rate is being charged can help keep a business partner afloat. It is much better to take a small loss than to drive someone into bankruptcy and risk that their bankruptcy will cause your business financial problems.

The Other Side of the V

Another service we provide creditors is representation during bankruptcy proceedings.

In order to preserve a debt owed by someone that has filed for bankruptcy, a creditor must file an adversary matter with the court. Filing an adversary matter puts the court and the debtor on notice that the creditor wants to be paid back. Sometimes these matters involve situations where the debtor has transferred assets to a third party (like a family member) in order to try and preserve the asset.

Having a customer that files for bankruptcy can be a problem even if they have already paid you back because the court may pull payments that were made during the 90 days before the bankruptcy filing back into the bankruptcy estate. The process of pulling paid debts back into the bankruptcy estate is known as a preference action, and there are several defenses to it. The most effective way to fight a preference action is before it occurs, so as soon as you get word that a current or former client has filed for bankruptcy, it is wise to speak with a bankruptcy attorney that has experience working for creditors.

Shape the Story

The radio commentator Paul Harvey used to conclude his broadcast by telling his listeners that they now knew “the rest of the story.” Knowing how a story usually goes, and what the viewpoints of different characters are, makes it easy to predict the ending. Our firm is good at helping our clients tell their side of the story and get the ending they want.  

How A Bankruptcy Brought Baseball Back To Milwaukee

We often reassure perspective clients who are having a hard time dealing with the thought of filing for bankruptcy that it might end up being one of the best decisions they ever make. Filing for bankruptcy forecloses some opportunities, but it can open up a whole host of other options. Those wanting proof of this concept must look no further than Miller Park. The Brewers exist because of a bankruptcy.

Milwaukee got its first major league baseball team in 1953 when the Boston Braves moved to town. The Braves were quite successful thanks to standouts like Hank Aaron, and the team set an attendance record for the league. But after a few years, ticket sales slumped, even though the team was doing well.

The team was eventually sold to a Chicago businessman who wanted to increase ticket sales and move the team to a larger media market. 1965, the Braves owners announced the team would be moving to Atlanta.

A legal battle soon broke out. “[A] criminal complaint was filed in Milwaukee County Circuit Court alleging that the Braves and the other nine teams in the National League had conspired to deprive the city of Milwaukee of Major League Baseball, and, moreover, had agreed that no replacement team would be permitted for the city. As such, the complaint alleged, the defendants were in violation of the Wisconsin Antitrust Act.”

The case went all the way to the Wisconsin Supreme Court, which ruled that the move was not criminal. On appeal, the United States Supreme Court only narrowly decided not to take up the case, leaving the Wisconsin Supreme Court’s ruling intact. The Braves were officially never coming back.

Then, in 1967, Major League Baseball (MLB) announced that it was adding several expansion teams. Kansas City, Montreal, San Diego, and Seattle were all getting a brand new team for their town for the 1969 season. Milwaukee was understandably upset. It, like Kansas City, had lost a team to another city, but it was not picked as the location of a new team. Many believe Milwaukee was snubbed by MLB as retribution for the lawsuit the state filed when the Braves left.

The citizens of Milwaukee were heartbroken, but perhaps none were more upset than the team’s minority owner, local businessman Bud Selig. Yes, that Bud Selig, the future Commissioner of Baseball.

As the four new teams rushed to prepare for the 1969 season, Selig and other Milwaukee business leaders were doing everything they could to convince an existing team to move to Milwaukee or get MLB to add a new team in the city.

Selig got lucky thanks to virtually everything that could possibly go wrong in Seattle happening. After just one season, the Seattle Pilots declared bankruptcy, becoming the first and only professional sports team to ever do so. Selig bought the team and moved them to Milwaukee, where they made their debut as the Brewers for the 1970 season.

The Pilots’ bankruptcy also worked out for fans in Seattle. The state of Washington sued Major League Baseball over the Pilots’ 1970 departure, and the league ended up allowing the Mariners to start up in Seattle in 1977.

As this story illustrates, bankruptcy can be a real catalyst for business development. It is impossible to predict what chain of events will be triggered by a bankruptcy, but often something good comes right along with what is at first considered something bad.

Keeping Litigation From Leading To Bankruptcy

ast month, the popular fireworks display company Bartolotta Fireworks Co. announced that it will close and become part of Wolverine Fireworks Display Company. Bartolotta, which was headquartered in Delafield, put on many of the largest pyrotechnic shows in the Milwaukee area, including the shows at Summerfest, Festa Italiana, Polish Fest, and German Fest. Reports on the company’s bankruptcy proceedings and business dealings suggest that a lawsuit filed against Bartolotta by Wolverine may have been partially to blame for the company’s financial difficulties.

Jeff and Donna Bartolotta, who owned 1/3 of Bartolotta Fireworks Co., filed for Chapter 7 bankruptcy earlier this year. The couple reported about $3.7 million in liabilities and $506,000 in assets. They noted that the Bartolotta Fireworks Co.’s “[p]rincipal secured lender has accelerated the debt and will be starting a collection action soon.” Other court documents reveal that Wolverine won a $154,000 judgement against the Bartolottas and the Bartolotta Fireworks Co. in a Michigan circuit court last year.

Our firm isn’t involved in the Bartolottas bankruptcy, so we don’t know anything about the case other than what has been reported in the news, but we wanted to highlight this case since some litigation obviously preceded the company’s bankruptcy.

There are a lot of bankruptcy filings out there that are sparked by litigation because it is such a costly and disruptive event for a business. One of the things that businesses who are in litigation, and fearing business disruption or financial difficulty should consider doing, is talking with an attorney about negotiating workouts to keep the business afloat.  

A workout is basically a loan modification that adjusts rates or payment schedules or whatever is necessary to keep a business going during a rough patch. Lenders and suppliers are often quite willing to negotiate such a deal because having a deal in place is better than having no deal in place, which might push their own business into trouble.

Owners that suspect litigation will cause financial trouble for their business should talk with an experienced business or bankruptcy attorney. Workouts are something that a traditional business litigator might not be familiar with, so finding a lawyer that knows what they are doing is critical. And it is important to have this talk sooner rather than later because workouts are a tool for preventing bankruptcy, not something that can be negotiated after bankruptcy is filed. Once bankruptcy is filed, any deals that are struck have to be approved by the bankruptcy court.

2 More Sporting Goods Companies File for Bankruptcy

If you or your kids participate in any sports or outdoor activities you know that all the gear that is required does not come cheap. You might think this means that the sporting goods retailers in your area are doing pretty well, but in just this past month, two well-known sporting and outdoor goods retailers have filed for bankruptcy.

MC Sports has seven stores in Wisconsin and all of them are closing. CEO Bruce Uller said in a court filing that “the rapid migration of sales from traditional brick-and-mortar retailers to online resellers,” competing distributors, specialty retailers and “changing consumer preferences” contributed to the company’s demise.

Gander Mountain has also filed for bankruptcy, although its filing was less of a surprise. Rumors had been circulating for about a month that it was planning on filing. It announced it is closing its stores in Eau Claire and Germantown, but plans to keep its other Wisconsin locations open while it seeks a buyer. It too cited the challenges of competing with online retailers in its filing.

Both companies filed for Chapter 11 bankruptcy, which allows filers to keep operating while they reorganize or find a buyer. However, Gander Mountain is the only one talking about doing so. MC Sports is liquidating their inventory and closing all of their stores.

These two are just the latest sporting goods chains with a presence in the Milwaukee area to declare bankruptcy or go out of business. Sports Authority, Golfsmith, Eastern Outfitters, and Sport Chalet have all previously closed some or all of their stores.

It will be interesting to see if Gander Mountain during its Chapter 11 process, and what happens to other retailers in this sector over the coming years. The two biggest players in the arena, Bass Pro and Cabela’s, are working on a $5 billion merger, which suggests there is still plenty of money to be made, but that efficiencies of scale are critical.

Online shopping is only becoming more popular, as all brick and mortar owners know, making it a threat to all sorts of retailers. The smart business owners out there are looking at their options, and for many, a reorganization bankruptcy is a good one.

 

Milwaukee YMCA Comes Out Of Bankruptcy Strong

We talk a lot about how bankruptcy provides people and organizations a chance to hit the reset button. But it is often difficult to find an example to illustrate what we are talking about because most people and businesses doesn’t want to share the gritty details of their finances with the public. So, it was exciting to read the recent Journal Sentinel story about the Milwaukee YMCA’s bankruptcy because it is the perfect example of how an organization can use bankruptcy to get a new lease on life.  

The YMCA’s Bankruptcy

In 2014, the Milwaukee YMCA filed Chapter 11 bankruptcy. At the time, the Y was around $30 million in debt due to a building spree started in the 1990s. Donations were declining, and the number of members kept falling, particularly after the 2008 financial crisis.   

Filing bankruptcy allowed the Y to sell off properties and right-size its workforce. The organization sold 8 of the 11 properties it owned, many of which were in the suburbs not Milwaukee proper. It also downsized from 365 full-time employees and 1,271 part-time workers to 140 full-timers and 580 part-timers.

If it had not filed for bankruptcy, the 155-year-old institution would have had to close. Because it filed for bankruptcy and took full advantage of the bankruptcy system, it had a budget surplus of around $650,000 in 2016, and it has a new plan for how to best serve the Milwaukee community.

Some Takeaways For The Rest Of Us

It would have been a real shame if the Milwaukee YMCA had closed. It’s not just a gym, it’s a modern-day piazza, a place where people can mix and mingle and grow the collective soul of our community. That is one reason why it is great that they chose to file for bankruptcy under Chapter 11.

Chapter 11 is often called a reorganization bankruptcy because the focus is not on shutting things down, but preserving what can be saved and setting the organization, or family, up for success in the future.

It is important for anyone who is filing under Chapter 11 to be willing to take a long, hard look in the mirror and decide what is important to them going forward. The Y had opened too many branches and was offering too many services. These properties were valuable assets though. Once the organization decided it needed to refocus its operations, selling off some properties allowed it to reinvest in the properties it was keeping.

Chapter 11 filers need to be willing to make tough decisions that allow them to move forward, and this typically goes beyond finances. Oftentimes the filer needs to do some soul searching to determine if the path they are on is just unusually rocky but will smooth out, or if it is a road to ruin. Bankruptcy is an opportunity to hit the reset button in a very broad sense, not just financially.

A lot of people think that filing for bankruptcy is the beginning of the end, but that is simply not true. As the success of the Milwaukee YMCA illustrates, bankruptcy can provide an opportunity to refocus, refresh, and come back stronger than before.  

Filing Under Chapter 12: A Lifesaver For Family Farmers & Fishers

Typically when we talk about bankruptcy we are talking about Chapter 7, Chapter 11, or Chapter 13 bankruptcy, but there is another chapter of the bankruptcy code that is important to talk about in a state like Wisconsin where may people farm or fish to support their families. Chapter 12 is a special chapter of the bankruptcy code that was enacted specifically so that “family farmers” and “family fishermen” can file for bankruptcy without losing all their assets and giving up their way of life.

Chapter 12 bankruptcies are like Chapter 11 or Chapter 13 bankruptcies in that the goal is to reorganize operations, and repay debts on a payment plan. However, Chapter 12 is simpler and less expensive to file under than Chapter 11, which was designed with large corporations in mind. But Chapter 12 is also a lot better at dealing with the large debts and less predictable income that characterize family farming and fishing operations than Chapter 13 is.

There are very specific rules governing who qualifies as “family farmers” and “family fishermen.”

If the filer is an individual or a family, they must meet all of the following criteria:

  1. The individual or husband and wife must be engaged in a farming operation or a commercial fishing operation.
  2. The total debts (secured and unsecured) of the operation must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fishing operation).
  3. If a family farmer, at least 50%, and if family fisherman at least 80%, of the total debts that are fixed in amount (exclusive of debt for the debtor’s home) must be related to the farming or commercial fishing operation.
  4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or, for family farmers only, for each of the 2nd and 3rd prior tax years) must have come from the farming or commercial fishing operation.

If the filer has structured their operation as a corporation or partnership, they must meet all of these criteria:

  1. More than one-half the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
  2. The family or the family and its relatives must conduct the farming or commercial fishing operation.
  3. More than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation.
  4. The total indebtedness of the corporation or partnership must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fishing operation).
  5. At least 50% for a farming operation or 80% for a fishing operation of the corporation’s or partnership’s total debts which are fixed in amount (exclusive of debt for one home occupied by a shareholder) must be related to the farming or fishing operation.
  6. If the corporation issues stock, the stock cannot be publicly traded.

Data from the Administrative Office of the Courts shows there were only 40 Chapter 12 bankruptcies filed in Wisconsin last year out of a total of 17,159 bankruptcies filed, so they are relatively rare. However, one high profile Chapter 12 bankruptcy has been in the news. A farmer down in Geneseo, Illinois has filed for Chapter 12 bankruptcy after the farm’s plan to sell high-quality, all-natural meat failed. Some customers are crying fraud, and the Illinois Attorney General has gotten involved, so we are keeping an eye on this case to see if it will impact the law governing Chapter 12 bankruptcies.

Milwaukee Once Again Leads Wisconsin In Bankruptcies

The Administrative Office of the U.S. Courts has just released its data on the number of bankruptcies filed during 2016, and once again Milwaukee leads the state in the number of bankruptcies filed.

17,159 bankruptcies were filed in Wisconsin during 2016, and 6,827 of those were filed in Milwaukee County. It is not surprising that Milwaukee County leads the state in the number of bankruptcies filed since it is also the most populous county in the state, but the number of bankruptcies filed there is still disproportionally high.

As a comparison, consider the number of bankruptcies filed in nearby counties:

Racine – 736

Ozaukee – 147

Waukesha – 856

Sheboygan – 242

A closer look at the Milwaukee bankruptcies reveals that 6,773 of the county’s 6,827 bankruptcies are non-business bankruptcies, meaning they are being filed by individuals or families. This suggests that people in the area are still really struggling to make ends meet despite the fact that the economists stay we are no longer in a recession.

If there is a silver lining to this dark cloud, it is the overall drop in the number of bankruptcies filed in 2016 compared to 2015. This trend carries through Milwaukee County, Wisconsin, and the nation as a whole.

In 2015, there were 7,630 bankruptcies filed in Milwaukee County. In 2016, that number fell to 6,827.

18,793 bankruptcies were filed in Wisconsin in 2015. In 2016, that number fell to 17,159.

Across the country, 794,960 bankruptcies were filed, down from the 844,495 bankruptcy cases filed in the previous year. This is a 5.9 percent drop in filings overall.

According to the Administrative Office of the Courts, this is the lowest number of bankruptcy filings for any calendar year since 2006, and the sixth consecutive calendar year that filings have fallen. However, 2016 was the first calendar year since 2011 that the rate of annual decline was less than 10 percent.

As we attempt to draw conclusions about what this data means, it is important to remember that bankruptcy as a concept is a mixed bag. Having a large number of people file for bankruptcy is not good since it means people and businesses are struggling in the grand scheme of things. But on a more micro level, filing for bankruptcy is like hitting the do-over button. Wiping away old debts and putting people and businesses on a stronger financial foundation so that they can have a second chance to create a good life for their family or start a new business is a good thing.

Should I file for bankruptcy before or after my divorce?

Going through a divorce is a stressful journey on its own. If your divorce is accompanied by financial problems, this stress is compounded. As you go through one of life’s largest hurdles, you may also consider filing for bankruptcy protection.  Not only can this step help protect you from an unscrupulous ex who may run up debt prior to your divorce, but it can also help you make a complete fresh start with less financial worry.

Chapter 7 or Chapter 13 Bankruptcy?

The decision about when to file for bankruptcy depends on a number of factors. The answer will largely depend on whether you want to file under Chapter 7 or Chapter 13. If you qualify for Chapter 7 bankruptcy protection and really want a fresh start, filing before your divorce is a smart option. The process only takes a few months and you can save on filing fees if you file jointly.

If, on the other hand, your joint household income is too high to qualify you for Chapter 7 bankruptcy, then you should decide whether your single income would be low enough to qualify after your divorce, or alternatively, seek Chapter 13 bankruptcy protection.

Income Constraints

In Wisconsin, if the two of you make less than $57,903 and have no children, then you should qualify for Chapter 7 bankruptcy protection before your divorce. If, however, your income exceeds that amount but your single income will be less than $43,958, it would be a good idea to wait until after your divorce to file for Chapter 7 bankruptcy protection.

If your joint and single income amounts are simply too high to qualify for Chapter 7 bankruptcy protection, then you may consider Chapter 13 protect after your divorce. Why after? Because it takes three to five years for a Chapter 13 bankruptcy proceeding to come to a close. Unless you want to continue in your marriage for those extra years, then it would be prudent to wait until after your divorce is finalized to take this next step.

Relationship Status

If you and your spouse qualify for Chapter 7 bankruptcy and are on relatively good terms during the divorce process, filing for bankruptcy before the divorce is finalized can be a good thing. If things are rocky though, your spouse may hinder your efforts to settle your debt situation. You need to be able to depend on your spouse to provide financial documents and appear in court.

Asset Questions

Another big item to watch out for is the distribution of your assets. It is important to talk to your attorney about the implications of a divorce settlement on bankruptcy protection, particularly for assets held jointly.

Thinking About Divorce and Bankruptcy

If you are struggling to meet your financial obligations during your divorce, there are ways to make things easier on yourself. The experienced bankruptcy attorneys at Hanson & Payne provide you with options for seeking bankruptcy protection during a divorce. Contact us today or call (414) 271-4550 for a consultation.

Wisconsin Ranks High In Nationwide Survey Of Credit Scores

How can you improve your credit rating and borrowing power?

A new study of consumer credit scores shows improvement nationwide. In its annual “State of Credit” survey, credit services company Experian reports that the average credit score increased four points since last year, to 673.

Wisconsin scored particularly high marks, with four of its metropolitan areas ranking in the top ten in the country— Green Bay (4th), Wausau (5th), La Crosse (8th) and Madison (10th).

Better Management of Debt by Consumers Played a Role

Modest economic growth and a national unemployment rate of around 5% may have contributed to the slight improvement. While scores have gone up, so has the amount of borrowing. Average credit card balances have increased over $1000 from $4,404 last year to $5,551 this year. Still, better management of debt and payments enabled credit scores to improve overall.

According to Experian, 673 is above average, while 720 to 50 are “prime” scores, and anything beyond, “super prime.” Better scores mean lower interest rates and easier approvals when renting an apartment, signing up for phone services, or engaging in other commercial transactions.

How to Improve or Repair A Poor Credit Score

If your credit score isn’t as high as you would like, there are a number of steps you can take.

  1. Request a free credit report online. These are available from many sites. Check your report for errors and, if you find any, bring them to the attention of the credit agency.
  2. Set up reminders or automatic bill payment to avoid late payments. This can be done usually through your bank’s online payment site or through the sites of companies billing you.
  3. Try to reduce the amount you owe. While difficult, this is will yield many financial and emotional rewards. Short-term strategies, such as transferring balances to a new credit card, will ultimately backfire and worsen your credit rating.
  4. Remember that your credit history stays with you for as long as seven years. Closing your account with a company will not erase records of missed payments or collection attempts.

A Repayment Plan or Personal Bankruptcy May Be an Option

Improving credit is easier said that done. Many people may need professional advice to deal with creditors and devise a payment plan. For some, personal bankruptcy under Chapter 7 of the Bankruptcy Code or a reorganization of debt under Chapter 13 (a so-called “wage earner’s plan”) may be a necessary stage on the path to financial recovery. If you are experiencing difficulties with your credit, an attorney experienced in personal bankruptcy law can help you find the best strategy for eliminating debt and rebuilding your credit.