Sometimes Bankruptcy Counsel Is A Hands On Job

When the bridal chain Alfred Angelo filed for bankruptcy and closed its stores earlier this year, it did so without much notice. Although the store managers were directed to send out all the orders they had on hand before shutting the doors for good, many did not. This left the company’s bankruptcy attorney with quite a mess on her hands. She got over 10,000 messages from panicked customers in just a few days, and she just couldn’t ignore them.

A recent Wall Street Journal article details her effort to get as many dresses and other items that have already been paid for, into the hands of the brides, bridesmaids, and other wedding guests who ordered them. This is a task she has undertaken more because she believes it is the right thing to do, than a legal responsibility.

While our firm’s lawyers have not yet had the opportunity to save the day for hundreds of brides, we wanted to share this story because it does a great job highlighting the fact that good bankruptcy attorneys are more than lawyers who know how to do math.

A good bankruptcy attorney is a problem solver. We know that business bankruptcies cause all kinds of issues for the creditors, suppliers, and customers doing business with a company that has filed. We try to minimize disruptions to the broader marketplace, while still keeping our client’s interest first.

A good bankruptcy attorney is proactive. When a potential client comes to us, we go over all of the options available to them. Sometimes we are able to help a business avoid bankruptcy by negotiating terms of forbearance or loan modifications with creditors.

A good bankruptcy attorney is willing to go the extra mile. Sometimes literally. While our offices are in downtown Milwaukee, we work with clients from all over Southeastern Wisconsin. We’ve put plenty of miles on our cars traveling the city streets, highways, and backroads of Milwaukee, Racine, Ozaukee, Waukesha, and Sheboygan Counties. We know that really understanding our client’s business and the situation it is in sometimes means we need to be on-site instead of in our offices.

If you are looking for a bankruptcy attorney that is will to go above and beyond to make sure things are done right in the moral sense as well as the legal sense, look no further. We make sure the i’s are dotted and the t’s are crossed and then some.

What Does the Average Consumer Bankruptcy Filer Look Like In Wisconsin?

The Administrative Office of the Courts has released its annual report on bankruptcy statistics. It provides a snapshot of the average bankruptcy filer in the United States, but it also breaks the data down by court, which allows us to get a glimpse of what the typical consumer bankruptcy filer here in Milwaukee looks like.

According to the report, in the United States as a whole, nearly 750,000 consumer bankruptcies were filed. Filers had assets of $72 billion and total liabilities of $191 billion.

Debtors in the Southern District of California and in the Northern District of California reported the highest average assets per petition at $344,000 and $224,000, respectively. Filers in the Western District of Tennessee reported the lowest average assets, $43,000.

Excluding districts with fewer than 200 case filings each, debtors in Western District of Washington reported the highest average liabilities per filed petition at $8,348,000. However, this data is skewed by one debtor in the district who reported total liabilities of $85,122,168,563. Filers in the Western District of Tennessee had the lowest average liabilities at $65,000.

The data from the Eastern District of Wisconsin gives you a good idea of what is going on with bankruptcies in the Milwaukee area since the majority of the bankruptcies in the entire district, which covers about half of the state, are from the 5 counties that make up the Milwaukee metropolitan area. 12,243 bankruptcies were filed in the Eastern District. Filers reported having over $737 million in assets and $1.1 billion in liabilities. This is an average of approximately $60,000 in assets and $90,000 in liabilities per filer.

Nationwide, approximately 61% of all consumer bankruptcy cases were filed under Chapter 7, which allows a debtor to liquidate their assets to pay off debts, then have most other debts forgiven. Around 38% of the cases were filed under Chapter 13, which requires the debtor to enter into a multi-year debt repayment plan that is supervised by the court. 52% of the people that filed under Chapter 13 were able to pay off all of their debts.

In the Eastern District of Wisconsin, 69% of the bankruptcy cases were filed under Chapter 7, while 34% of the cases were filed under Chapter 13. Almost 46% of the debtors who filed under Chapter 13 were able to pay off their debts.

The median average monthly income reported by all debtors was $2,668 (1 percent higher than in 2015), and the median average reported monthly expenses were $2,590 (less than 1 percent higher than in 2015). Filers in the Northern District of California had the highest median average monthly income with $3,500, and filers in Puerto Rico had the lowest median average monthly income with $1,848. Filers in the District of Connecticut had the highest median average expenses with $3,520, and filers in Western District of Tennessee had the lowest with $1,720.

In the Eastern District of Wisconsin, the median average monthly income reported by filers was $2,516. Median reported expenses were $2,478.

This all suggests that Milwaukee debtors are pretty average, which is a good thing! On average, people who live here are bringing in more money than they rack up in necessary expenses each month, and people here don’t have outrageous levels of debt. This means bankruptcy is an option that can help people in this area get back on their feet.

As American as Apple Pie

One of the best things about this country’s bankruptcy law is that it is inherently optimistic. It embodies a belief that people and businesses deserve a chance to start over without the shackles of debt holding them back, and it encourages financial risk taking by acting as a safety net. Viewed in the abstract, there is something about this that is just so quintessentially American. You might say bankruptcy is as American as apple pie.

What’s funny about saying bankruptcy is as American as apple pie is that neither apple pie nor bankruptcy were invented in the United States. Both were imported, perfected, and popularized here, however.

The roots of bankruptcy law go all the way back to Biblical times. In Chapter 15 of the book of Deuteronomy, it says:

“At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you.”

This sounds similar to today’s Chapter 7 bankruptcies, which forgive most debts. Even the period between debt cancelation years echoes the current requirement that filers wait a certain number of years before filing for bankruptcy again.   

Ancient Rome had laws that allowed creditors to seize the property of debtors who were unable or unwilling to pay, and allowed debtors to volunteer themselves as indentured servants to pay off debts. It is not too much of a stretch to see echoes of this system in our Chapter 13 bankruptcy law, which allows debtors to consolidate their debts and work on paying them off over a period of time.

In other parts of the world, and in different time periods, debtors’ prisons were common. Debtors were arrested and held in these facilities until they could pay off their debts. As you can imagine, this was counterproductive since someone who is in prison cannot earn a living that will allow them to pay off debts.  

What we think of as modern-day bankruptcy law was imported from England, like most of our laws were. Article 1, Section 8, Clause 4 of the U.S. Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” They did so almost immediately, and have continued to tinker with the law from time to time.

As the arch if history suggests, bankruptcy law is not frozen in time. It continues to undergo changes. Our bankruptcy laws have been amended over time to adapt to new circumstances and the changing economy. Today, the world looks to America as an example of what a successful, cutting-edge bankruptcy system should look like. When we change our law, other countries around the world often do so as well.

D-D-D-Defense

If you are a true Packers fan, you know that January 23, 2011 was one of the most exciting days in recent memory for the Packers’ defensive line. The Packers were playing Bears in the NFC Championship Game at Soldier Field. By the time the 4th quarter rolled around we were winning, but it was an ugly game. Then, seemingly out of nowhere, Packers defensive tackle B.J. Raji intercepted a pass and returned it for a touchdown. The 338-pound Raji then broke into a very memorable hula dance, and the Packers went on to win that game, and the Super Bowl.  

Preference defense is not as exciting as the Packers defense, but it can be just as critical to your success as the Packers defensive line is to the team’s success.

A preference defense is necessary when a preference action is filed against your business. Preference actions are the technical legal name for the notice you get when a customer files for bankruptcy. They exist because the court has the power to claw back any funds paid to you by someone who has filed for bankruptcy if the payment was made within 90 days of the bankruptcy. Policymakers gave courts this power because they don’t want people who are planning on filing bankruptcy to pay off their favorite creditors and leave others in a lurch. This is where the term preference action comes from.

Policymakers also wanted to make sure that debtors couldn’t transfer assets to a creditor just to keep them out of the bankruptcy estate. They wanted to make it easy for the courts to claw back assets if they thought anything other than business as usual was going on.

Although preference actions were created to protect against shady behavior, most preference actions are filed against a business that was just going about its business as usual, not suspecting that its customer was in financial distress. No wrongdoing is necessary on the part of the creditor for a preference action to be filed against them.

Fortunately, there are several defensive tactics that creditors can rely on if served with notice of a preferential action. For example, if the payment or transfer of other assets to you was made at the time of the sale or transfer of something of value to the debtor, and that is how you typically did business, and how you intended this transaction to go, you may be able to use a contemporaneous exchange defense. This defense is common, and is why a lot of contracts specify that they are cash-on-delivery (COD).

Most preference actions settle, so it is a good idea to talk with an experienced bankruptcy attorney about what your options are if you are served with one. It is understandably frustrating to pay someone to protect money that is rightfully yours, but it is better to pay a little than to pay it all back to a court. Just like with the Packers, a little defense can help you take your deals to the end zone.

Credit Counseling Is Not Just Another Hoop To Jump Through

There is a Revolutionary War era fort in Morristown, New Jersey known as Fort Nonsense. Legend has it that Washington has his men construct the fort in order to keep them busy and out of trouble during a winter encampment in the town.

The idea that Washington needed to keep his men thinking about the war and out of trouble makes a good story, but scholars say it is probably not true. Forts like the one Washington ordered built were a common form of defense, and he typically had more things on his to-do list than he had soldiers to do them, so soldiers were not just loafing around during the winter months.

There are a lot of things about the bankruptcy process that are Fort Nonsense-like. Numerous aspects of the process seem like they are only there to make filing more difficult and time-consuming than it needs to be. However, each step of the process exists for a particular reason.

Credit Counseling Is Not Nonsense

Take credit counseling for example. Debtors that want to file for personal bankruptcy under Chapter 7 or Chapter 13 must first seek credit counseling with a court-approved provider. This may seem like just another hoop that a would-be filer must jump through, but everyone who takes the credit counseling requirement seriously learns a few things that can help them manage their finances better in the long term. This is true even in cases where the debtor has been forced into bankruptcy by something like surprise medical bills.

The counselors typically work with a debtor to put together a budget, and discuss strategies for sticking to it. Counselors also make sure the debtor understands how to avoid financial risks and the importance of having a good credit score.  

Depending on the type of program, the credit counselor might also help the debtor consolidate debt, negotiate a better deal on existing debt, or set up a repayment plan.

Some debtors who were previously planning on filing for bankruptcy find that they no longer need to do so after they have worked with a credit counselor.

Finding A Counselor

As mentioned above, the courts have a list of approved credit counseling providers. Debtors who want to file for personal bankruptcy under Chapter 7 or Chapter 11 must get counseling from someone on the court’s list.

Here in the Eastern District of Wisconsin, there are counselors that will meet with you face to face, or you can work with a counselor over the phone or online.

Even though it is mandatory, counseling is not free. The credit counseling providers can charge a reasonable fee for their service. However, if a debtor absolutely cannot afford to pay, the counselors are supposed to work for free, or at a reduced rate.

At the end of the counseling course, the debtor will get a certificate of completion. This certificate must be filed with the court or the bankruptcy judge will throw the case out.

When Chapter 11 Just Isn’t Working Out As Planned

Coming to terms with the fact that a business is failing is extremely difficult for many business owners. A business almost becomes an extension of oneself after so much heart and soul have been poured into it. And business owners tend to be overly optimistic, otherwise they never would have started a business in the first place.

Many business owners facing bankruptcy want to file under Chapter 11, which allows them to retool, and move forward rather than wind down their affairs. But Chapter 11 is not the best option for all businesses. Many times a business simply cannot be salvaged, no matter how much the business owner wishes it could be. In such a situation, it may be necessary to convert a Chapter 11 bankruptcy into a Chapter 7 bankruptcy.

A Recent Example Of A Chapter 11 to Chapter 7 Conversion

There have been several sporting goods retailers with stores in the Milwaukee area file for bankruptcy over the past couple years. MC Sports, which is based in Michigan but had 7 stores in Wisconsin, filed for Chapter 11 bankruptcy in February 2017. It began liquidating its inventory to pay back creditors while looking for a buyer that could bring the business back from the brink. In late May, the company asked the court to convert its bankruptcy from Chapter 11 to Chapter 7 after it was unable to find a buyer and had decided to close its doors permanently.  

Conversion is Common

This is not an unusual situation. Many businesses that file under Chapter 11 and continue to struggle, even after taking advantage of the benefits that the bankruptcy law provides, end up converting to Chapter 7 and winding the business down completely. Reorganization is simply not possible for every business out there.

Debtors who filed under Chapter 11 typically have a one-time absolute right to convert the case from a Chapter 11 case to a Chapter 7 case.

Sometimes Business Owners Have No Choice But To Convert

Sometimes debtors have no choice but to have their case converted to a Chapter 7 bankruptcy. A party in interest, which includes creditors, can file a motion asking the court to convert a Chapter 11 case “for cause.”

There are many ways a party in interest can show cause. They can show the business is being mismanaged, present evidence that the business is continuing to lose money and is unlikely to recover, or alert the courts that the public is being put at risk by the continued operation of the business in question. These are just a few of the most common ways a party in interest can show cause. The Bankruptcy Code sets forth numerous examples of cause that would support conversion.

Don’t Guess Or Go It Alone, Contact An Experienced Bankruptcy Attorney

Business owners who are struggling to make Chapter 11 work, and creditors or other parties in interest who are frustrated with a case they are involved with, should not hesitate to speak with an attorney about converting a Chapter 11 case into a Chapter 7 case. There are few downsides to converting, but an experienced bankruptcy attorney can explain the pros and cons of converting a specific case.

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.