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Archive for the ‘Business Bankruptcy’ Category

Small Business Bankruptcy in Texas

July 16th, 2018 at 11:52 am

bankruptcyThe modern business world is tough, especially for smaller firms. If your small business has run into serious financial distress, you are far from alone. Right now, it may be time for your company to review its available options, to work towards shedding or restructuring some of that overly burdensome debt. Bankruptcy is one option that is on the table for your company. However, it is certainly not the only option and it is not always the best option. Here, our experienced San Antonio business bankruptcy attorneys offer tips for weighing whether or not it is time for your small business to file for bankruptcy protection.

Know Your Situation, Know Your Finances

When your business is facing financial distress, it is time to take a very hard look at the books. You need to know your finances, your assets, your debts and your projected future revenue like the back of your hand. Indeed, the key to making the best possible decision is knowing the true financial standing of your company. It is imperative that you enter the debt restructuring process with full knowledge and a clear head.

Always Consider Non-Bankruptcy Options First

Filing for business bankruptcy is a big step. It is neither right nor necessary for every financially distressed Texas small business. Our firm focuses on helping businesses find the best available solution for their individual needs. We always carefully consider all available non-bankruptcy options first. Your company may be able to get back on firm, stable financial footing with a less disruptive method, such as debt consolidation or voluntary debt restructuring. If you go down this road, our attorneys can help you negotiate the terms of these agreements.

Make an Honest Assessment

Finally, small business owners will need to make an honest assessment of the state of their business. While bankruptcy is not the appropriate legal tool for every financially distressed company, it is necessary in many cases. Further, waiting too long to file for bankruptcy may result in your business falling into an even bigger financial hole, making it very difficult to restructure and dig yourself out. The bottom line: If your small business is facing serious financial troubles, you need to take action now. The sooner you address the problem, the better off your company will be.

Request Your Free Business Bankruptcy Consultation

At the Law Offices of Chance M. McGhee, our passionate San Antonio business bankruptcy attorneys have extensive experience serving the unique needs of small businesses. If your small business is facing significant financial distress, we can help. Please do not hesitate to contact us today to set up a free review of your case.



When a Business Lease is Not a True Lease

March 1st, 2017 at 8:00 am

Here are the factors for determining whether a business lease is treated as a true lease in bankruptcy or rather as a secured purchase.  

A couple days ago we ended our blog post saying that we would next “get into the special business-oriented factors the bankruptcy courts use to determine whether a lease is a true lease.” We described the benefits that a true lease gives to the lessor. And we showed the ways that recharacterizing a lease as a secured purchase can greatly benefit the business debtor.  

When a Business Lease is Not a True Lease

Some initial principles:

  • Federal bankruptcy law often works closely with state laws. This includes state laws determining whether a lease is a true lease. Bankruptcy law does not define a lease, and yet makes significant consequences arise from labeling a transaction a lease. So we look to state laws for making this determination.
  • Especially in the context of business asset leases, in interpreting state lease law bankruptcy courts look to the substance of the transaction not at the name given to it. Look to the economic substance of a transaction instead of whether or not it’s called a lease.
  • The courts do not put weight on the subjective intent of the parties—whether they think it’s a lease or not. Instead they look to the objective factors found within the lease agreement and in the parties’ economic relationship.

Factors Relevant to Business Leases

Consider the following questions, in the context of an equipment lease, to get at the substance of a lease vs. secured purchase:

  • What is the total amount of the lease payments compared to the value of the equipment? Do the “lease” payments compensate the lessor for the lessee’s ongoing use of the lessor’s property? Or do they pencil out more like payments of principal and interest?
  • Did the lessor manufacture or purchase the equipment specifically for the lessee’s use? Was it specifically designed for the lessee, so that its continued business operations depend on its use of the equipment?
  • Did the lessee assume the typical risks and obligations of ownership instead of the lessor? Which one is contractually responsibility for paying insurance, taxes, maintenance and upkeep?
  • How does the term of the lease compare to the useful economic life of the goods? Is the lessee required to renew the lease for the equipment’s full economic life?
  • What happens to the equipment at the end of the lease term? Is the lessee allowed or required to buy the equipment at the end of the lease at a modest payoff? Is the lessee required to purchase it under certain conditions?

Overall, if the equipment has little or no value at the end of the lease, the transaction is more likely a purchase. If the lessee is able to buy the equipment cheaply, the economic substance of the deal is less likely a true lease than a purchase.


Whether an agreement is a true lease or a disguised secured financing arrangement can be hugely important when you, the lessee, file bankruptcy.  Be aware that economic substance—not the agreement’s title or your subjective understandings—is the determinative factor.


Business Leases Recharacterized

February 27th, 2017 at 8:00 am

A business leases may not be a true lease but rather recharacterized as a secured purchase, giving you significant power over the creditor.  

Our blog post a week ago was titled “Leases that Are Actually Secured Purchases.” Sometimes a transaction labeled a lease is legally not truly a lease but is really a disguised purchase. Leases give the lessor/creditor a lot of leverage over you, the lessee/debtor. If you can persuade your bankruptcy court to recharacterize the “lease” as a secured purchase, you are usually in a much better position.

Last week’s post reviewed this from a consumer perspective. Today’s focus is on business leases, using an equipment lease as an example.

Disadvantages of True Leases in Bankruptcy

As a lessee, such as on a business equipment lease, very soon after filing bankruptcy you must choose between “assuming” or “rejecting” the lease. You “reject” the lease if you are not keeping the leased equipment. If you want to keep the equipment, you “assume” the lease.

That comes with the following disadvantages.

  • If the lease has below-market payments, the bankruptcy trustee may “assume” the lease ahead of you. The trustee does this to sell the lease rights to another party and then pay the proceeds to your creditors. So you could lose equipment you need to operate your business.
  • If you were behind on your lease payments when filing the bankruptcy case, you must cure any missed payments quickly.  
  • If you fell behind after filing bankruptcy while deciding whether to assume the lease, you have to catch up on those as well.
  • You have to make the full regular lease payments going forward, with no break in price.
  • At the end of the lease you return the leased equipment. That’s true unless the agreement allows you to renew the lease or to purchase the equipment. You’re stuck with whatever the lease provides.

After Recharacterization

In contrast, if the equipment lease is recharacterized as a disguised purchase:

  • A trustee may under limited circumstances have some say about keeping the equipment. But generally, if your business needs the equipment and you meet some basic requirement, the trustee can’t take it away from you.
  • If you qualify for “cramdown,” you don’t have to pay any missed payments. As long as you entered into the transaction more than a year ago, and the equipment is now worth less than the remaining balance, you qualify for “cramdown.”
  • With “cramdown,” your monthly payment is reduced, as well as the total you pay for the equipment. The balance owed is divided between secured and unsecured portions. The secured portion matches the amount of the value of the equipment. The unsecured portion is the rest, the portion not covered by the equipment’s value. The monthly payments are reduced because they are based on only the secured portion. They are also often stretched over a longer period, possibly at a lower interest rate.  You pay the unsecured portion only to the extent that you have available funds to do so.
  • At the end of the payment period, you own the equipment free and clear.


Our next blog post will get into the special business-oriented factors the bankruptcy courts use to determine whether a lease is a true lease and so deserves the benefits that gives to the lessor.


Business Leases of Personal Property

February 24th, 2017 at 8:00 am

With business leases you have the same options in bankruptcy as with consumer leases: to “assume” or “reject” the lease. 

Our last three blog posts have been about leases of personal property in bankruptcy. We’ve been focusing mostly on consumer leases. Now let’s see how it works in the business context.

“Personal Property” in a Business

Let’s first clear up one thing. Personal property does not mean consumer or non-business property. It simply means property that isn’t real property. (Real property is real estate—“any property attached directly to land as well as the land itself.”)

Personal property for a business would include equipment, office furniture and equipment, computers and other electronic hardware, and vehicles used by the business.

Business Leasing

It’s possible to lease just about anything needed in business. Leasing gives you the use of necessary business assets without paying up front for it or tying up your credit. The main downside is that you almost always pay more in the long run. And you commit yourself to keep the business asset for a set period of time.

Bankruptcy Options with Unexpired Leases

In general, regardless which bankruptcy Chapter you or your business files under, you have two basic options with leases.  You can retain the use of the property by “assuming” the lease. If so, you are required to “assume” ALL of the obligations under the lease agreement. Or you can “reject” the lease. Then you return the leased asset. And, if you are in a bankruptcy Chapter that provides for this, any remaining liability is “discharged”—legally written off.

There’s a lot to this, depending on your type of business entity, the terms of the lease, and your continued need for the leased property, among many considerations.

Individual vs. Business Liability

Who is the lessee on the lease agreement? Is it in the business’ name or in your name as an individual? Is it in the business’ name but with you as a co-signor or guarantor?

If you have a small business, usually you will be on the hook for all liabilities on the lease. You may well have directly signed the lease, or signed a guaranty. Or if you own the business as a sole proprietorship, you are individually liable for all obligations of the business.

Sole Proprietorship vs. Corporation

A sole proprietorship is not a separate legal entity from you, unlike a corporation or a limited liability company. Corporations and such can own property and owe debts on their own. Sole proprietorships cannot. So if you operate a sole proprietorship, you are liable on the business’ lease agreements. That’s true even if you operate it through a state- or city-registered assumed business name, and only that name is on the lease agreement.

To be practical, most of the time a lessor will require all small business owners to be individually liable. That’s again done either by requiring you to sign the lease agreement or an accompanying personal guaranty. This is usually true regardless whether you have a sole proprietorship or a corporation or whatever. The liability-avoiding purpose of having a corporation or LLC are often defeated this way in practical reality.

So, most of the time you are personally liable on the lease, and often on all of the business’ other obligations.

Filing Individual Bankruptcy

Assuming you are personally liable on your lease, and on all or most of the debts, you will need to file an individual bankruptcy case. If you have a sole proprietorship, it cannot file and does not need its own bankruptcy. (Whether your corporation or other business entity should do file one is beyond this discussion.)

You will likely have the option to “assume” or “reject” your business lease regardless which bankruptcy Chapter you file. Here is a very broad summary of how this works in Chapter 7, 11, and 13.

Chapter 7, 11, and 13

Under a Chapter 7 liquidation, if you assume the lease and are behind on the lease payments or are in breach of any other terms, you must get current and/or cure the breach within a month or two.  If you reject the lease, you surrender the property and your liability is usually discharged within about 4 months.

Under a Chapter 11 reorganization, you usually have more time to cure any breach. But Chapter 11 is a relatively expensive and time-consuming procedure that is seldom appropriate for a very small business.

Under a Chapter 13 adjustment of debts, you also have more time to cure a breach of the lease. It is a much less expensive procedure—it can easily cost one-tenth as much than Chapter 11. Only individuals can file under Chapter 13; corporations and other business entities cannot. But usually, even on a business lease, there is only personal liability. Or the personal liability is the only one that matters. If you assume the lease, you must still accept all the lease obligations. And if you reject the lease, any obligations arising from it are included with the rest of your “general unsecured” debts. You may have to pay some portion of that. But usually you are only paying a set, limited amount to all those “general unsecured” debts, so adding in the lease obligations does not increase the amount you would pay overall.


“Priority” Wages and Benefits Owed to Employees

September 14th, 2016 at 7:00 am

If you owe an employee wages or benefits, it’s likely a priority debt. Same if you are owed wages or benefits.  More likely to be paid.


We’ve been writing in recent blog posts about “priority” debts, such as child/spousal support and income taxes.

In a Chapter 7 case the bankruptcy trustee pays these in full ahead of paying anything whatsoever on other debts. See Section 726(a)(1) of the U.S. Bankruptcy Code. (That’s only if the trustee has any of your assets to liquidate, which is usually not the case.)

In a Chapter 13 case you have to pay priority debts in full during the life of the case. See Section 1322(a)(2).

Employee Wages and Benefits

There’s a type of priority debt that doesn’t come up nearly as often as child/spousal support or income taxes. But when it does it could be very important.

Under certain conditions a debt for unpaid employee wages, salaries, commissions, or benefits is a priority debt. If you’ve operated a business and owe this type of debt, it’s important to know how it’ll be treated.

Why It’s Important

Whether or not a debt for unpaid wages and benefits meets the conditions for being a priority debt especially matters if:

  • You are filing a Chapter 7 case in which the trustee is paying creditors, and you prefer that your employee(s) get paid ahead of other creditors. Then you want the wage/benefits debt to be a priority debt. That way it’s more likely your employee debt(s) will get paid.
  • You are filing a Chapter 13 case and you have very limited amount of money to pay your debts. Then you prefer the wage/benefits debt not to be a priority debt. That way you are not required to pay that debt in full. That makes your Chapter 13 plan less expensive to fund, perhaps turning an impossible situation into a feasible one.

The Conditions that Make a Debt to an Employee a Priority Debt

The basic rule:

  1. a debt for wages, salaries, or commissions (including vacation, severance, and sick leave pay)
  2. earned by an individual within 180 days of the bankruptcy filing or the closing of the business, whichever comes first
  3. up to $12,850

is a priority debt.

Chapter 7 Example

Let’s use two examples reflecting the scenarios mentioned above.

First, imagine you operated a business in your name that you closed the same day you filed a Chapter 7 case. You didn’t have the money to pay your single employee $3,000 for her final month of wages. You really want her to get paid. You also owe $100,000 in other personal and business debts.

You’re pleased to hear that $3,000 is a priority debt because it meets the 3 conditions listed above.

As your bankruptcy lawyer told you to expect, your Chapter 7 trustee asks you to turn over the last of your business equipment. The trustee liquidates the equipment, receiving $4,000. Out of that the trustee pays himself a fee of 25%, $1,000. (See Section 326(a).) The trustee pays your former employee the remaining $3,000, paying her off in full, because it’s a priority debt. Your other debts receive nothing, and are discharged (permanently written off).

Chapter 13 Example

Second, imagine you operated a business in your name that you just closed. Your single employer had quit 6 months ago. You suspect that one of the reasons your business failed is because that employee had been referring customers to a competitor, and getting paid a kickback fee. He started working for that competitor as soon as he stopped working for you. You have some evidence backing up your suspicions, but a lawyer has told you your legal case is weak against both your former employee and your competitor and simply not worth pursuing.

This employee’s regular salary was $4,000 per month. Because money was so tight during the final 6 months of working for you he agreed to let you hold back $1,500 of that salary monthly until you could afford to pay it back. The amount of back pay totaled $9,000. You feel like he owes you many times that amount of money for cheating you. And you certainly don’t want to pay him that $9,000 as a priority debt in the Chapter 13 case you’re filing.

So you’re happy to learn that this $9,000 debt is not a priority debt. It meets two of the 3 conditions listed above, but not the third one. Your former employee did not earn any of that $9,000 within 180 days of the close of the business or of the filing of your Chapter 13 case. So that debt is just a “general unsecured” debt. You pay it only to the extent you have enough disposable income to pay it, after living expenses and other more important debt. In many Chapter 13 cases the “general unsecured” debts are paid only pennies on the dollar. Sometimes they’re paid nothing.

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