SEVEN CONCEPTS
or retirement monies. They have
other stuff, but it has no realizable
value.
The senior home lender is owed
$1.2 million including delinquent
payments of about $200,000
(payments and other charges).
Interest runs at 4.5%. The junior
lender is owed $500,000 principal
and $200,000 in delinquent
payments and other charges -
$700,000 in total. Interest runs
at 12%. It appears that the junior
lender is effectively unsecured.
(This fact is gold when it comes
to voting.) Credit card and other
personal
debts
are
another
$200,000. You are aware that the
junior lender believes that it holds
a secured claim, at least in part.
Business debts are $150,000.
Income and payroll tax obligations
are paid timely.
The Smiths have been trying to
balance their debts for a period of
years. They have not been honest
with their creditors. They have
made many promises and broken
these promises many times. They
lack credibility with their creditors.
The facts here are typical of many
small cases, a lot of debt, a lot
of broken promises, unhappy
creditors, little money, no real
understanding of the problems and
beaten up debtors. Though their
situation is dire, a chapter 11 case
can work. They need reassurance
from you that they can succeed.
Concept 1- The Small Case. Most
chapter 11 cases are small. They
have small revenues and a small
asset base. They have a limited
ability to fight through a chapter 11
case. Many do not make it through.
However, the benefits of success
are immense, e.g., the family home
and the business can be saved.
What are some problems of being
a small case in Chapter 11? The
court’s and the U.S. Trustee’s
requirements are extensive and
often burdensome. Many of these
requirements were written for large
companies but they apply to all
chapter 11 debtors, of whatever
size.
Second, creditors who are angry or
vengeful can swarm into a case and
overwhelm the chapter 11 case.
On the debtor side, the budget
to oppose this creditor is modest
and you may not have enough
information to effectively fight the
creditor, so opposing the over
aggressive creditor is hard.
A third concern is the time demands
the case puts on debtors in small
cases. They have lives to live. They
do not have the time you need them
to put into the chapter 11 case.
The Seven Concepts and This
Case. Fourth, most debtors are not highly
sophisticated in the law and in
business. They will not understand
much of what goes on in a chapter
11 case. Their lack of understanding
will lead to frustration which they
will take out against their attorney.
Do not take it personally.
Let’s apply the seven Concepts to
the debtors’ situation. To do this,
I will use business, strategic and
legal ideas and I will offer some
other case examples to help explain
the seven Concepts. What should you do? First, get in
front of the curve by filing first day
motions, e.g., to use cash collateral,
a budget motion and a motion to
pay priority payroll to the business’
employees. The motions give you
National Association of Consumer Bankruptcy Attorneys
Spring 2018
the opportunity to tell the judge the
debtors’ story before the creditors
tell the judge that your clients
broke promises. Tell the judge
that the Smiths are following the
rules of bankruptcy and state which
ones. Third, offer to make regular
payments to the senior home
lender. Payment builds credibility.
It also makes you look good in the
Court’s eyes.
As to the third concern above,
the demands on the small case
debtors, this is a serious problem
which can lead to failure unless the
attorney does something about it.
First, have an outside bookkeeper
work on the business’ record
keeping and help track the family
expenses. Make sure that person
reports to you any problems. Keep
the debtors informed so that they
can see progress and keep their
hopes alive.
Concept 2: Know the End Game; Set
up the End Game Before the Case
Begins. In chapter 13, creditors can
object; they cannot vote. In chapter
11, on the other hand, creditors can
both object and vote. Before you
file a chapter 11 petition, have a
good idea what the likely classes of
creditors will be, who will be placed
into which classes, whose votes will
matter and how individual creditors
are likely to vote.
In chapter 11, classification of claims
into classes is often the key to obtain
the votes necessary to confirm a
plan. Similar claims are placed into
the same class. Dissimilar claims
are placed in different classes.
Each secured claim is placed in its
own class. If the classes are not
being paid in full pursuant to the
terms of their contracts, then they
are impaired. At least one impaired
class must vote to accept the
plan. For the unsecured creditor
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