During these difficult economic times, many businesses that have been contacting Shenwick & Associates are faced with the threat of insolvency. Insolvency occurs when a business is unable to pay its debts as they become due. A very common business expense is a lease obligation. For most businesses, an office lease is essential to survival. Without a space to operate following eviction, most businesses would immediately fail. In order to prevent the harsh consequences of eviction, a business may seek protection through bankruptcy.
Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.
For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.
Tuesday, September 23, 2008
Monday, September 15, 2008
Tougher Bankruptcy Laws Bite the Lenders
By Jessica Silver-Greenberg
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place. And that's bad news for lenders, which suffer financially every time they have to take a troubled property on their books.
Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. "[The rules] are directly responsible for the rising foreclosure rate," notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: "These studies don't stand up to scrutiny."
Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.
They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure.
ONLY TEMPORARY RESPITE
As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: "In some cases, bankruptcy has become so onerous that it's not worth it to save the house."
The pain of foreclosures, of course, isn't limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.
Cases such as Yvonne Reina's will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: "I just couldn't make it work anymore."
Silver-Greenberg is a reporter for BusinessWeek.com.
Copyright 2008 by The McGraw-Hill Companies Inc. All rights reserved.
Monday, September 08, 2008
When Chapter 11 Is the End of the Story
The 2005 rules are squeezing out bankrupt chains, which face harsher time constraints than in the past
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
When Sharper Image filed for bankruptcy back in February, new Chief Executive Officer Robert Conway decided to close half of the chain's 184 stores and craft a turnaround plan. But critical court deadlines loomed, and Conway, a restructuring specialist, gave up hope a few weeks later. In July the company shuttered the last location. Says Conway: "Not only do lenders have limited patience, but there are many additional pressures."
It would be difficult enough if retailers were just getting hit by the double whammy of weak consumer spending and tight credit. But new bankruptcy rules passed in 2005 are proving fatal for some. In Chapter 11, companies continue to operate while getting relief from creditors. The recent changes, though, require that businesses move more quickly on key decisions and find cash up front to pay off certain debts.
Facing those hurdles, retailers such as Sharper Image, Wickes Furniture, Bombay, Levitz Furniture, Friedman's, and Whitehall Jewelers have rapidly dissolved, going from broke to out of business in a matter of months. In previous downturns, it took years to reach that dramatic end—and most companies actually emerged from bankruptcy. The worry is that more retailers will disappear. Roughly 15 have filed for Chapter 11 so far this year, more than double the number in all of 2007, according to research firm bankruptcy.com.
Although the new rules apply to all companies, retailers are feeling the changes acutely. Before 2005, businesses had an unlimited amount of time to file a restructuring plan. Now they have 18 months to do so. After that, creditors and other interested parties can offer up their own ideas to the court. In a concession to mall owners and landlords, the new laws also force retailers to decide within 210 days whether to keep a location open. Under the old procedure, courts would grant extensions of two years or more. "Lenders are not willing to refinance a shopping center if a major tenant hasn't decided whether to stay," says J. David Forsyth, a partner at Sessions, Fishman, Nathan & Israel.
But time can be crucial. Retailers often need to monitor sales trends for at least a year, including the highly profitable holiday shopping season, before getting a complete picture of their prospects. Macy's (M), which filed for Chapter 11 in the early 1990s, took two years to hash out a plan and three years to climb out of its financial hole. "In stress situations, you have to analyze by circumstances and not make deals under a formula," says Harvey R. Miller, a partner at firm Weil, Gotshal & Manges, who is working with Goody's Family Clothing, the 355-store chain that filed for Chapter 11 on July 9.
Bankrupt companies also have to come up with cash to pay suppliers and utilities. Under the old laws, the two groups had to wait until a company emerged from bankruptcy before collecting. Those demands can be particularly burdensome on retailers, which may have bills from dozens of vendors and multiple water, gas, and electric companies. Steve & Barry's, the bankrupt apparel store that was acquired by a private equity firm on Aug. 22, manages operations across 39 states. Says Lawrence C. Gottlieb, a partner at Cooley Godward Kronish, which is representing creditors of the bankrupt Linens 'N Things: "Liquidity is sucked out of the debtor in a way that becomes hard to survive."
Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.
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