Alternatives to Bankruptcy in Michigan
Attorneys suggest solutions for navigating financial troubles
on August 4, 2021
Updated on July 11, 2022
By the time the company contacted attorney Scott A. Wolfson, its cash-flow issues had reached critical mass. “The CEO walked me around his facility, then described the company’s unsuccessful negotiations with its lenders over the past three years,” says Wolfson, who works with distressed companies and corporate debtors at his Troy-based firm Wolfson Bolton. “Things had progressed in an irreversible manner. He was [going to lose] control to his lenders.”
While clients initially assume bankruptcy is the only recourse, Wolfson says non-bankruptcy solutions are feasible more than 90% of the time. If a situation is left to fester, though, bankruptcy may be the only viable option.
Business owners who act quickly at the first hint of money concerns are more likely to recover without filing. “[There is] a lot of leverage and negotiating power before the lawsuits are filed or the vehicle is repossessed,” says Leigh Dones Moss, an attorney specializing in business law and bankruptcy alternatives at Moss Law in Bloomfield Hills. “My goal is for them to maintain control of the outcome.”
Moss says business owners should compile a list of their creditors, and include the balance, terms and status of each account. This can be used to create a strategy for tackling the debt—one that usually focuses on secured loans with a personal guarantee first because “even if the business closes or files for bankruptcy, the individual is still going to be on the hook,” Moss adds.
Direct negotiations with a creditor can generate a restructuring of payment obligations and ease the financial crunch. Landlords are often open to these agreements, and may temporarily accept reduced rent or add skipped payments to the end of the lease.
Some secured creditors, such as banks, may require more intense discussions. “The bank may forbear from enforcing its rights while the business works to restructure, or it may insist on a quick-sale process to monetize its collateral,” says Wolfson. “We examine the bank’s collateral position to determine whether a bankruptcy filing could impact it negatively, and if so, use that to our negotiating advantage.”
Understanding both current and projected cash flow is key, Wolfson says, as it helps guide possible resolutions. Business owners with minimal funds or who anticipate that the root cause of the financial distress will be an ongoing problem may find that selling assets relieves the bottleneck.
When a transportation service lost all revenue at the start of the pandemic, the business owner was unable to make the vehicles’ loan payments. She opted to pivot, and began using some of the vehicles for delivery services. Moss is now helping her sell the remainder of the fleet.
“We find buyers for the assets,” Moss says. “If you are unable to find someone to buy it for the full amount due or more, there’s a balance, and you negotiate with the creditor on that balance.” Outstanding debts can frequently be settled for just 30 to 50 cents on the dollar if there are hardships or extenuating circumstances for the debtor, she says.
Government funding has provided a lifeline—and the potential to circumvent bankruptcy—for many struggling business owners, too. “These days I confirm that the company has tapped any governmental aid programs for which it qualifies, such as the Paycheck Protection Program,” says Wolfson. “I have seen those provide a bridge to a long-term solution.”
Beyond PPP loans, Moss encourages businesses to apply for Economic Injury Disaster Loans, which are available until the end of the year. These funds, combined with a push to collect outstanding accounts receivables, can help a company remain solvent as it works to restructure debts or sell assets.
Inventory adjustments may also provide critical liquidity. “Depending on the business, where they might have kept a greater inventory in the past, now they can slow down some of their orders and sell the inventory that’s on hand,” Moss says.
In the end, the business owner’s debts, assets and long-term goals converge to define the best path forward. For companies that remain open, Moss strongly recommends putting a business continuity plan in place to keep them from facing similar predicaments in the future. “What will I do if my IT goes down? What if there is a fire? A pandemic?” says Moss. “I like to see business owners think about these things in advance and apply for a line of credit now, so if there’s a financial crisis, you have a financial net.”