SEVEN CONCEPTS
Concept 3 : Genesis of the Filing - the Problems . In chapter 11 , the court must find that reorganization is not likely to be followed by liquidation , the feasibility requirement like in chapter 13 . Identify the problems which led to the chapter 11 filing and be prepared to discuss why the problems occurred , e . g ., the business problems or the problems with the debtors .
Here , what are the Smiths ’ problems ? Costs of goods sold (“ COGS ” - the direct costs of the construction jobs ) is really high so cash flow is negative . The debtors need to learn how to bid and to estimate costs better and how to keep financial records . Explain these and any other problems to the court and explain why they occurred . Show the Court that you understand the problems .
With high costs of goods sold , explain in the first day motions the problem and why it occurred . It may be that the Smiths business had several jobs come in at the same time , it lost control over costs and had a tremendous amount of unbudgeted overtime which the company paid , not the project owner . Perhaps they have no sense of COGS and cost controls . They may understand COGs but lacks the skills to manage them .
Identify every problem for the Court . Identify even small ones as those often can be fixed faster than large problems like the high COGS .
Concept 4 : Fixing the Problems . This is the continuation of Concept 3 ( identifying the problems ). This is the cure - Solving the problems . Whatever is broken has to be fixed . Fixing problems is hard . Really hard .
Here is a good example of fixing the problems from a chapter 11 case of mine back in the 1990s . The debtor owned a computer store which was in trouble because two computer chain stores had opened up nearby and had undercut the debtor on price and inventory . We considered the debtor ’ s store and the chain stores ’ strengths and weaknesses . We identified seven different strategies to create positive cash flow for the debtor . We told the judge what we were going to do .
Two of the solutions worked really well . One was to offer premium services such as installation and training ( at a premium price and a high profit margin ) to older people . Older people ( those over 40 years ) really wanted the extra service . The other solution was to market to one local ethnic group by re-doing part of the store to be more comfortable for them and giving them more time to shop while their children watched cartoons on a large screen television . Word spread quickly in the community and they shopped at the store in droves .
The superstores could not match these solutions . The debtor had positive cash flow and his plan was confirmed .
So , let ’ s apply Concept 4 to the Smiths . Costs of goods sold at 80 % is very high . This may be poor management or money slipping out the back door . Figure out why COGS is so high . You have to be involved . This also allows you to explain to the judge what went wrong and how it got fixed . Perhaps the debtors do not include a sufficient mark up for materials or labor . Perhaps the debtors need to solicit multiple bids from subcontractors . Fixing this problem can fix the negative cash flow . This will free up more money for the home , for the plan and for your fees .
Beyond COGS , look at the overhead expenses . While they may not seem high , there may be ways to reduce them . Small cuts in overhead can make a big difference to the plan . Ask employees about expenses they believe can be cut . In filings with the court ( and served on creditors ), identify the improvements .
You , the attorney , may not feel comfortable identifying problems and solutions . My experience is that most debtors cannot correctly identify the problems and the solutions . For help , ask retired business owners , the debtors ’ accountant ( though most CPAs lack real business experience and have no experience with troubled business ), turnaround experts ( but their prices are usually too high and the results too meager ), industry groups , creditors and employees .
Attorneys incur significant fees in chapter 11 cases and many attorneys will struggle to collect the fees . If you want your fees paid for your work in chapter 11 , then you make sure that the problems are fixed and that they stay fixed . This means you stay close to the debtors both during the case and after plan confirmation .
Concept 5 : Accepting Responsibility .
Rudyard Kipling said it well : “ I never made a mistake in my life ; at least , never one I could not explain away afterwards .”
I have seen debtors explain to the court that someone else caused the problems , that they are victim of someone else e . g ., the lender ,
National Association of Consumer Bankruptcy Attorneys Spring 2018 CONSUMER BANKRUPTCY JOURNAL 47