January is an important time to set goals, finalize budgets, and strategize for the coming year. Francesca Macchiaverna discusses how businesses can benefit from extending credit to their clients in this article for BiS.
Bankruptcy has become a major reality in today’s business world due to the combination of a lengthy recession, high unemployment and a sluggish real estate market. Although filing for bankruptcy can help restructure or reduce business debt, the choice does not come without serious consequences.
Bankruptcy laws are designed to help individuals and business owners who can no longer pay their creditors get a “fresh start” by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also provide for orderly distributions to business creditors through reorganization or liquidation.
Many businesses and business owners are in financial trouble during the current “Great Recession.”
Real estate related companies such as developers, community banks, mortgage brokers, realtors and contractors are particularly at risk. The reasons are simple: the bubble has burst, the value of commercial real estate has declined by 30% or more, the borrowers are required to continue to pay interest, the banks are required by the regulators to “clean up” their books by dumping real estate loans and demanding higher interest and earlier pay-downs of principal, and the borrowers have run out of cash at a time when their incomes are severely depressed.
In a recent decision handed down by the Eleventh Circuit Court of Appeals in March 2010, a vendor dealing with a company operating in Chapter 11 was ordered to give back almost $2 million in payments on post-bankruptcy invoices – because, unbeknownst to the vendor, the debtor did not have authority to expend its cash. When considering any business transactions with companies operating within bankruptcy proceedings, it is essential to protect yourself from a similar situation that subsequently can result in significant losses.
In the recent economic slowdown, many national and regional retail chains — like Steve and Barry’s, Linens ‘n Things and Goody’s Family Clothing — have resorted to bankruptcy courts to downsize or liquidate.
Additional filings are likely to occur before this economic cycle is over. Landlord preparedness and knowledge is key when it comes to protecting assets and minimizing risk.