Ethan Ganc on Bankruptcy and Insolvency

Recently, our publisher Robin Dillard sat down with attorney Ethan Ganc to discuss bankruptcy and insolvency. These topics are top of mind for many business owners these days. The Coronavirus Pandemic

Ganc has served as a trusted legal advisor to businesses large and small, from start-up to well-established, and their principals. His work is both transactional, including, among other things, drafting and reviewing a variety of agreements, vendor contracts, and leases, and also includes litigation in the event of disputes. He has particular expertise in the area of creditors’ rights, both inside and outside the context of bankruptcy proceedings, and in counseling businesses experiencing financial difficulties. This video interview is to talk about creditors’ rights. Law Office of Ethan Ganc 212-929-7500 ethan@ethanganclegal.com

What is bankruptcy?

Bankruptcy is a legal mechanism created by federal law that allows a business or individual to be able to put a halt to the demands of creditors and address outstanding debt. Bankruptcy is enshrined in Article I, Section 8 of the Constitution, which gives Congress the power to enact uniform bankruptcy laws.

What are the benefits of a bankruptcy filing?

When a bankruptcy case is filed, it immediately halts any efforts by creditors from taking any steps to collect upon any debts that existed before the bankruptcy filing. Among other things, it stops any existing lawsuits as well as prevents any creditors from initiating lawsuits. This is called the automatic stay.

Depending on the type of case filed (see discussion below), the debtor may be able to (i) avoid paying certain debts altogether, (ii) restructure certain debts, (iii) shed burdensome leases and other contracts, and (iv) continue operations while downsizing.

What are the different kinds of bankruptcy relief available?

Chapter 7 – Liquidation. This is the simplest form of bankruptcy and is available to both businesses and individuals. In the case of a business, the business is shut down and a trustee is appointed to administer assets. The debtor’s assets (with some exceptions), if any, are liquidated and distributed to creditors, but the debtor has no obligation to make ongoing payments to creditors.

Chapter 11 – Reorganization. Although Chapter 11 is seen mostly in the context of business, it is available to both business and individuals. In normal cases, the debtor continues to operate under existing management. The debtor proposes a plan to repay all or a portion of its debts, which plan must be approved by the Bankruptcy Court.

NOTE: Effective February of this year, Chapter 11 now contains a simplified version for “small businesses” under Subchapter V, which makes it easier and therefore cheaper for small business to take advantage of the provisions of Chapter 11. As a result of the recently-passed CARES Act, for the next year, a business with debts of no more than $7.5M is defined a small business. (Normally, that threshold is $2.7M.)

Chapter 13 – Adjustment of Debt for Persons with Regular Income. This form of relief is available only to individuals. Similar to a Chapter 11, the Chapter 13 debtor proposes a plan of either 3 or 5 years to repay all or a portion of his or her debts. The plan must be approved by the Bankruptcy Court.

Personal Bankruptcy as a Result of Business Debts

Typically, in order to obtain credit for a small business, the business owner is required to agree to be personally liable for certain kinds of business debts, a concept known as a personal guarantee. Personal guarantees are often required in getting business lines of credit and commercial leases. As a result, regardless of what happens with the business, the principal(s) of the business will be on the hook for these obligations. The business owner may therefore benefit from a bankruptcy filing or be forced to file for bankruptcy. The good news is that in many circumstances, the business owner will be eligible to file for a bankruptcy under Chapter 7 because the eligibility requirements do not apply to a debtor whose debts are primarily business debts.

Reasons Not to File for Bankruptcy

Corporate Chapter 7 – If a company has no assets and does not intend to continue operating, there may be no benefit to filing for Chapter 7. In a Chapter 7, a debtor that is not a person does not receive a discharge of its debts. Moreover, the trustee appointed in the case may well scrutinize the debtor’s books and records and has the power to avoid and recover (“claw back”) excessive income received by the principals or other financial transactions with or run through the company.

Personal Bankruptcy – Not all debts are dischargeable in bankruptcy. If the debtor is a business owner and has failed to pay employee-related withholding taxes (e.g., FICA) or to pay other taxes, whether personal or business-related, he or she will usually not be able to discharge those liabilities. There are many other kinds of non-dischargeable debt including child or spousal support.

Attorney Ethan Ganc has been practicing law since 2001. He founded the Law Office of Ethan Ganc in 2010 after working for many years at one of New York City’s most respected boutique corporate firms. Over the course of his career, Ethan has represented a wide variety of business clients, including commercial landlords, real estate investors, equipment leasing and financing companies, general contractors, advertising agencies, and magazine publishers. Ethan has experience advising and counseling businesses on a range of legal matters such as negotiating contracts, including vendor contracts, master services agreements, consulting agreements, and non-disclosure agreements; litigating business disputes; and structuring business entities at their formation. He has expertise representing the rights of creditors in all types of bankruptcy proceedings as well as corporate and individual debtors in all facets of chapter 11 and chapter 7 proceedings.

For more information, visit ethanganclegal.com.

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