The Bankruptcy Process Part I: Planning for the Filing

Filing for bankruptcy does not just happen; it requires significant planning and coordination if it is to be successful.

Success, of course, is relative, and will mean different things depending on the intended Chapter you file under, and if you are an individual or business entity.

The first step, regardless of your plans, is to obtain knowledgeable legal counsel who knows bankruptcy law. They, along with your financial advisors, will guide you through the process.

Why Bankruptcy?

People and businesses ultimately choose to file for bankruptcy for a wide variety of reasons. The issue that drove the bankruptcy decision needs to be addressed head-on, rather than allowing history to repeat itself. The result of bankruptcy must not merely reset the clock, but right the root of the problem.

Individuals filing for bankruptcy will need to deal with the “means test” to assess which Chapter for which they are eligible. Credit counseling may also be required.

Initiation

Bankruptcy is initiated by the debtor when they file a Schedule and a Statement of Financial Affairs (SOFA) with the bankruptcy court. Making the schedules requires the debtor to accumulate information regarding their assets, along with the related value of those assets. Liabilities must also be enumerated and detailed by the creditor and the amount owed and the related nature of the liabilities as secured, priority or unsecured.

The SOFA is a detailed set of questions requiring the debtor to disclose a significant amount of historical data, governance information, legal matters, and other substantive information related to the debtor, its assets, contingent matters, commitments and history.

Both the schedules and the SOFA are filed under penalties of perjury. Accuracy is critical, as failure to properly disclose is a potential federal crime.

Before You File

Business entities also have several additional matters to attended to before filing. Some of those matters include:

• Organize a communication plan with customers, vendors, and employees. The filing will cause an immediate reaction, and the communication lines need to be open to maintain and sustain these relationships.
• Assess Executory Contracts. The debtor entity has a limited time to accept or reject their executory contracts, like leases. Consider the viability of those contracts to the continuing entity.
• Consider the sale of the business and or its assets in the proceeding. Known as a 363 Sale, this will require significant, upfront work to position the business, set up due diligence information for potential acquirers, identify potential buyers, (a Stalking Horse), as well as bidding and sale procedures.
• Examine financing as a potential necessary action to get through the bankruptcy or exit. Accordingly, identify potential lenders and Debtor in Possession (DIP) financing packages to negotiate.
• Develop cash flow budgets for the pendency of the filing. These projections will be necessary to support the Cash Collateral Order, a part of the initial matters to be taken up by the court.

Regardless of the Chapter of the Bankruptcy Code you file under, working with your advisors to assemble all of the information, prepare the analysis and develop a plan for an exit before you submit schedules to the court will ease the process and minimize the disruptions as you move through the process.

Learn more about bankruptcy and other questions you should ask yourself before filing.