2009 March: Know When to Fold

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2009 March: Know When to FoldNobody ever wants to have to file for bankruptcy, but in these tough economic times, more and more pizzeria owners are being forced to do so. “Pizza used to be a bulletproof business,” says attorney Marvin Wolf, the New Jersey State chair of the National Association of Consumer Bankruptcy Attorneys. “This economy is different.” Wolf has noticed that a couple of local pizzerias have closed in his own New Jersey neighborhood. “It used to be that people skipped expensive dinners in tough economic times and went out for pizza. Now they are eating at home it seems.”

He is right. Around the country, small pizzerias are shuttering their doors for good. And those that are not closing are at least feeling the pinch. Even the big pizza companies are not immune. Midland Food Services, a Pizza Hut franchisee based in Ohio, filed for Chapter 11 bankruptcy back in August.

Pat Steen, the director of marketing for Midland declined to talk, but did say that anyone filing for bankruptcy ought to “consult their own attorney” and described their process as more of a “reorganization” than an ending.

According to Wolf, “hiring a qualified and knowledgeable attorney,” is the first step towards a less painful process.

Many wait too long, says attorney Mark Zuckerberg of Indianapolis, Indiana. “There is this public perception that people have run up all this debt on purpose,” he says. “That is just not true. So often when people come to me they have been throwing good money after bad for such a long time they are in more trouble than they would have been had they just come when the trouble began.”

Zuckerberg sees small business clients who have been digging into their employee withholding taxes in an effort to save a failing business. “Everybody is hopeful, they put their blood into this business,” he says. But many times this will not work and then people are also in trouble with the Internal Revenue Service.

According to Wolf, there are two major signs that it is time to consider filing. The first is an inability to pay suppliers —“are your liabilities greater than your assets?” he asks. The second is an inability to pay debts. “If it is taking you more than 180 days to pay your debts, that is when you are in trouble,” Wolf says.

“Generally, a petition is filed with the Bankruptcy Court setting for the debtor’s identifying information and financial circumstances,” says attorney Patricia Glover of Roswell, Georgia. “The petition is in a very specific format and should not be attempted without an attorney.”

A good lawyer is also important in terms of determining first, whether a case is a bankruptcy and second, what kind of bankruptcy needs to be filed. Because they are a corporation, Midland fi led for Chapter 11, the most oft-cited form of bankruptcy. But it is not the only one. Most smaller pizzerias are likely to file Chapter 7 or Chapter 13.

In a Chapter 7, all assets are liquidated and sold to repay creditors. In a Chapter 13, funds are rearranged so that debts can be repaid, but the business remains open. In a Chapter 13, creditors must be repaid more than they would in a liquidation to make it worth their while.

Once it is determined what type of bankruptcy is to be filed, the owner must gather all relevant information and documents, a painstaking process, which can be extremely time-consuming, says Wolf. Once the paperwork is completed, it is time for the hearing in which a trustee of the court examines the petition.

“Creditors are also notified of the hearing date and may appear in order to question the debtor,” Glover says. “From that point, the process to get a debtor a discharge varies depending upon the type of petition filed and the complexity of the case.”

Bankruptcy laws are federal laws, but each state governs what property may be retained in a bankruptcy different. For many smaller owners, the process is made even trickier by the amount of personal assets invested in the business. In a corporation, like Midland, there are no second mortgages or personal assets as collateral, but for a smaller company, a business failure can leave the individual proprietor open to personal lawsuits as well.

In this case, more often than not, the individual will also have to file a personal bankruptcy. As in the business bankruptcy, the owner must prove that he or she cannot pay creditors and is, “an honest but unfortunate debtor,” says Wolf.

For many, the decision to fi le for bankruptcy is the best decision they have ever made, says Wolf who claims to have a drawer full of letter from clients grateful for the opportunity to start fresh. On the other hand, he also has a drawer full of the opposite. “It is all in what you make of it,” he says.

Glover agrees. “The positives of fi ling a bankruptcy are relief from otherwise insurmountable financial obligations and a fresh start. The negatives are generally confined to poor credit immediately after the discharge and the possible loss of assets under a liquidation scenario,” she says.

Despite it’s obvious drawbacks, Wolf says bankruptcy is one of the beautiful things about doing business in the United States. “America is designed so you can fail.” ?

The 5 Different Kinds of Bankruptcy

The kind of bankruptcy that a business files is not always the same and will require consultation with legal counsel to determine which filing makes the most sense. The five types of bankruptcy are:

? Chapter 7. This applies to an individual, a couple or business partners. A trustee is put in charge of identifying which assets will be exempted from bankruptcy. The rest of the assets are then sold and distributed among creditors. ? Chapter 9. This type of bankruptcy proceeding particularly deals with municipalities.
? Chapter 11. Usually only applies to business corporations. It usually involves restructuring, debt consolidation and other means of reorganization.
? Chapter 12. This type of bankruptcy is exclusively for family farmers and fishermen. All debts are paid out of future earnings.
? Chapter 13. A bit like Chapter 11, but for an individual. The filer is allowed to retain his property and pay off his credits out of his future salary.

Sasha Brown-Worsham is a freelance writer in Somerville, Massachusetts. Her work has appeared in a variety of publications.