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Business bankruptcy can be a common term in today’s world with the effects of the pandemic on the economy, and it has many struggling companies wondering just how it works. The first step for a business that is even considering filing for bankruptcy is to contact an experienced and reputable bankruptcy attorney to determine the exact path forward. This ensures that legal counsel is advocating for the client’s best interest regardless of the next steps required.

What A Business Bankruptcy Attorney Does

A proficient bankruptcy attorney should have a great deal of experience in many different aspects, primarily because no two businesses are the same and will likely not have the exact same plan for closure or recovery.

Some of the general services a bankruptcy attorney should have experience with can include:

• Acting as counselors to businesses on both business debtors and creditors
• Representing the debtor and creditors lending money to the debtor with a court approved plan called a debtor in possession loan
• Assisting with sale or exit financing if a business is selling an asset in connection with the bankruptcy
• Reviewing tax considerations before declaring bankruptcy
• Discussing if there is a need to file bankruptcy or to avoid it
• Determining the optimal timing for filing for bankruptcy if it is needed

These attorneys may also help with entities that amidst a bankruptcy want to buy the business as a whole or the majority, if not all of their assets. This is typically done via what is called a plan of reorganization in which a debtor prepares a plan, makes a disclosure statement, and files it with the court, and then sends a disclosure statement to creditors. Then the creditors will have a chance to vote. If the classes of creditors approve the plan and certain requirements are met, the court can in turn approve the plan and the debtor can either sell its assets or continue in business with an obligation to pay its creditors over time.

Another and probably more common scenario is when a new buyer purchases the assets, or a new shareholder comes in and takes over some, if not all, of the stockholder positions in the company, new money goes into the company and the creditors are paid from it, leaving the business free of the old creditors. This is generally considered a successful bankruptcy.

What A Business Bankruptcy May Not Restore

While many bankruptcy plans can cover a multitude of issues, there are some things that it may not be able to restore. For example:

• The guarantee by a shareholder is not necessarily dissolved in the process
• Tax obligations such as payroll taxes could leave some individuals unpaid depending on how the bankruptcy process plays out

Is Business Bankruptcy Right for Me?

If a business is in trouble, but not so much trouble that it would have to shut down and tell all their employees to go home, their shareholders not to expect any money, and the creditors that they will get what they get once inventory is sold for scrap, and as many accounts receivables are collected as possible, then bankruptcy might be a valid option.

Today, it is becoming increasingly common for a business in trouble to find themselves in that debacle due to temporary trouble from a temporary event they experienced or that affected the entire economy. A case in point would be the coronavirus crisis. Many hotels, restaurants and other businesses struggled greatly as a result of the pandemic, and if it had not been for PPP loans and other government subsidies, they may very well have gone under. Other businesses simply have hope that once things stabilize, people will go back to work and the economy will pick up again. There will be some businesses that struggled in the past two years that should be able to bounce back, sometimes with the help of the bankruptcy process.

For example, if creditors are ready to foreclose upon a business’ assets, the bankruptcy process can halt continuing collection activities. In other words, a lender for a hotel that had a first lien would not be able to foreclose. Without the bankruptcy process to stop this, lenders would be able to foreclose at will and this is something that should be avoided.

How Business Bankruptcy Works

If a business owns a property and believes they have a future despite a lender threatening to foreclose, it may be time for the business to reorganize, find a new lender and investors, and sell at least some assets to satisfy the lender.

A business that goes into bankruptcy then has to make arrangements to provide adequate protection to its creditors. Hypothetically, in the case of a real estate asset in which the business is dealing with a first lien holder, it requires them to make periodic payments. This does not necessarily mean the note would be paid off in total. If a business files for bankruptcy, a creditor cannot foreclose as the court mandates that as long as the business makes adequate protection payments (generally the interest that accrues and some depreciation allowance on the building), keeps their taxes current, and complies with pertinent ordinance and safety laws, they are usually allowed to continue to pay the creditor as the plan works out.

After this stabilization, the debtor must be able to fund itself. While a traditional bank may be hesitant to lend money due to the risk, there are provisions in the bankruptcy code that allow a court to say that future accounts receivable, inventory, and newly acquired assets will not be given to the traditional lender who has liens filed. Their liens will apply to the inventory and accounts receivable as of the day the bankruptcy entity files its petitions.

This generally means that any inventory required or accounts receivable after that would be unencumbered. This is a good thing because it allows a new lender to come in and make a secured loan. This can be called debtor in possession (DIP) financing in which a DIP loan is made, approved by the court, and the lender provides the money while taking new inventory, assets, and accounts receivable as collateral.

This turn of events may induce the legacy lender (the pre-petition lender – often a bank) to become the DIP lender. They are usually already familiar with the customer and the collateral, and they then have a stake in making sure the bankruptcy process works because they want to collect as much pre-petition debt as they can, meaning they have an interest in continuing that relationship.
This can result in striking a deal with the bank detailing the proof of claim, how much is owed, an agreement to that number, and an agreement that they have a lien position on those assets, but not newly acquired accounts receivable and inventory. In return for continuing to lend to the business, the bank will get the first lien. This is a common scenario going into bankruptcy.

Once foreclosure is abated and there is new financing coming in, a business will have to figure out their plan of reorganization. This means taking into account the following considerations:

• Whether or not there are assets to be sold to continue the business
• Whether or not new investors can come in
• If existing investors will put up more money or value into the debtor so unsecured creditors can be paid

A typical plan makes arrangements to refinance real estate, big equipment loans, typically financed by long term debt. Then unsecured creditors from the pre-petition period are paid something. For example, it may look like a new investor coming in and arranging to secure the real estate and equipment assets while putting in enough money to pay the legacy or pre-petition unsecured creditors twenty cents on a dollar. The plan may then be approved and shortly after the investor puts in money, checks go out to the unsecured creditors.

However, in some cases where the long-term debt is stabilized and the unsecured creditors are paid through a liquidating trust where the ongoing future business takes some specified percentage such as 30% of their profits over the next five years. That percentage is then distributed to the unsecured creditors over the next five years, which may or may not be enough to pay the debt in full. Secured creditors generally get paid either the value of their collateral or the amount of the debt, whichever is less. However, the unsecured creditors can be more at risk because they may not get much at all.

For this reason, unsecured creditors get to vote. There are two different votes they have in order for them to be considered to have voted yes as a class.

1. Identify how many unsecured creditors are there regardless of how much they are owed, and if 50% of those creditors vote for the plan, it passes the first hurdle.
2. The second hurdles includes taking the list of unsecured creditors and scoring them by the amount of money they are owed, and there is a process to determine that. By that measure, two-thirds by the dollar amount of the class need to approve in order to meet the second hurdle. Some statutory requirements usually have to be met and there is a hearing, but generally speaking, if the unsecured creditors approve, the plan has got a good chance of being accepted. If unsecured creditors do not approve, and the other classes approve or at least one approves, then the court may do what they call a cram down, where they have a hearing to essentially determine if it is in the best interest of or is it equitable to allow the plan to go forward even without the approval of the unsecured creditors. If the plan is not allowed to go forward, either a business goes back to the drawing board and comes up with a plan that works, or the case is converted to a Chapter 7 and a trustee comes in and liquidates the company, which can be bad news for unsecured creditors because they may not get anything at all.

If you have additional questions about business bankruptcy, how it works, or how a business bankruptcy attorney can help, be sure to reach out before filing in order to better protect your rights and future.

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Mortgage foreclosures in Texas have been a part of the real estate industry for years, but the process can be so intricate and complex, it leaves many wondering exactly what they are and how they work. This is a critical concept for sellers, buyers, borrowers, and lenders to have. Whether you are facing a foreclosure or are an entity struggling to foreclose on a piece of real property, a knowledgeable real estate attorney is an asset you will need moving forward.

What Is a Foreclosure?

When someone buys a piece of property, they generally have to borrow money to do so either from a bank or mortgage company. Sometimes a seller will even make a loan, and then the buyer/borrower will sign a promissory note committing to make payments over a predetermined number of years and pay interest on it. Should those payments not be made, the buyer or borrower agrees their house can be foreclosed upon.

The instrument that allows a foreclosure to happen is often referred to as a deed of trust which acknowledges the real property in open records so the public can see that the lender has a lien on the property. This action protects some other lien or subsequent buyer of the property from declaring they were unaware about the mortgage or debt on the property because it is a matter of public record.

In a deed of trust there is something called a power of sale clause, which gives the holder of a mortgage the right to foreclose on a property if there is a default on the mortgage. These defaults can be considered breeches of the deed of trust and may take different forms, such as:

• Not making a required payment
• Not paying insurance on the property
• Not paying taxes on the property
• Not paying homeowners’ association dues
• Damaging or modifying the property in a way that affects the property’s value

If there is a default and the borrower and the lender have been unable to work out their differences, the lender may choose to go ahead and foreclose. If the property is a residence which is the primary residence or homestead of the owner, the mortgage company is required to give the borrower a limited window of time to cure a default. In other words, if the borrower has three payments to make up or taxes to pay, they may be able to do so in this window.

If the borrower fails to cure a default, then the mortgage company or holder of the note can accelerate the mortgage requiring the borrower to pay the entire balance of the note due immediately or else the property may be foreclosed upon in twenty-one days. At this time the lender will post the property in the county where the property is located.

How Foreclosure Sales Work

Foreclosure sales are typically set for the first Tuesday in every given month, with the exception being if the first Tuesday of the month falls on either January first or July fourth, in which case the sales would take place on Wednesday.

A foreclosure sale can in some ways be reminiscent of a wild west auction. In general, they occur in front of a county courthouse, although Harris County in Texas has been known to hold it at the Bayou Event Center. This event attracts a wide variety of people who attend with the intent to pay cash in the form of cashiers checks to the trustee or substitute trustee conducting the sale.

These sales are set within a 3-hour window usually between the hours of 10a.m. and 4p.m. on that first Tuesday of the month. A trustee will come forward and announce they have a property for sale along with some statutory required information. They will then verbally declare they will allow the property to be bid on and normally the mortgage company will start the bidding.

The mortgage company can bid the balance of their note as a credit bid, which means they do not have to come up with the money because they already have it. The balance of the note still generally includes attorney fees, interest that accrues, the principal balance of the note, other things a mortgage company may have had to do to secure or insure the property, and a reasonable commission for the trustee who sells the sale.

Once bidding opens, the high bid is often from the mortgage company. This is frequently why a property is foreclosed upon to begin with, because the property does not have enough value to cover the balance of the mortgage due to the lack of equity. If the mortgage company bids and no one else does, the trustee or substitute trustee will issue a substitute trustee’s deed to the mortgage company. The mortgage company then owns the property.

There are some cases in which after a mortgage company takes ownership that they may have to go through an eviction to take the house. However, in general, most mortgage companies do not like to hold on to houses and instead prefer to have someone fix up the property, list it with a realtor, and sell it as quickly as possible.

If there is some equity in the property and the bid by the creditor is low enough that other people want to bid too, they can. It is not uncommon to see groups of people who attend foreclosure sales every month in search of finding a property that is worth bidding on and then entering a bidding war. It is worth noting that these individuals and groups must have cash or cashiers checks ready to pay to the substitute trustee’s deed upon conclusion of the sale.

At this point, the substitute trustee must then take their commission, pay the balance due to the mortgage company, and then the excess money can go to whoever has the next claim on the property. This may be the owner if there are no other liens on the property. In some situations, in which there is a sizeable amount of money left over, a trustee may choose to enter the money into the registry of the court and name others who may be on lien or title documents to have claim to it. This may be followed by the trustee having their legal fees paid and then stepping away from the lawsuit, leaving lien holders to fight it out for the money.

How Foreclosures Can Sometimes Be Halted

Just because a lender has posted the property for foreclosure does not necessarily mean they are going to actually foreclose. There are three specific situations in which foreclosures may be halted, such as:

1. A solution between the borrower and lender. It may be possible in the 21 days between the posting of the property and the actual foreclosing of the property for a borrower to work something out with the lender and either get caught up or have a buyer for the property.
2. Injunctions and TROs. Should there be a dispute between the borrower and lender due to the amount of equity in the property, the borrower may have a court enter an injunction enjoining the lender from foreclosing. This can take the shape of a TRO or temporary restraining order of 14 days. This often requires the borrower to post a bond, something they are frequently unable to do if paying the mortgage was already a challenge.
3. Bankruptcy. This is becoming increasingly common. On the day of or before the foreclosure, some people will file either Chapter 13, 11, or 7 bankruptcy that in turn places an automatic stay that prevents a foreclosure until the bankruptcy case is dismissed or the court enters an order to modify or lift the automatic stay.

How an Attorney Can Assist with the Foreclosure Process

Lawsuits can happen both before and after a foreclosure and typically a knowledgeable attorney’s assistance is needed to ensure a smoother process. Real estate attorneys can assist with:

• Getting temporary restraining orders
• Helping a client file bankruptcy to prevent a foreclosure
• Representing lenders if a borrower is not paying and refuses to vacate the property
• Representing buyers of loans who go through the process of negotiating with lenders and proceeding with foreclosures
• Helping with related title issues

Foreclosures do not just apply to houses, although that is the most common scenario. Foreclosures can also happen on high rise buildings, farms, raw land, oil and gas rights, or any interest in real property that is financed and has a lien on it. For assistance with all things related to foreclosure, ensure that your rights are protected with the help of a reputable attorney.