Workout and Turnaround Case Studies
Our typical client is a small businessman who perceives that his business is failing, and who has been advised by other professionals to seek bankruptcy advice.
We have learned over the years that bankruptcy protection is seldom the first choice of remedy. There are many reasons for this.
First, the only reorganization protection for businesses is under chapter 11 of the Bankruptcy Code. This statute is designed for large businesses. Smaller companies simply cannot afford the special legal, accounting, and management costs (typically $50 - $150,000) that formal bankruptcy reorganization entails. Moreover, a company that is losing money prior to bankruptcy will, if not "repaired," continue to lose money while under court protection.
The Bankruptcy Court will not allow itself to be used as a shield to allow a company to run up more debt, and such a company will be (at least in this district) converted to chapter 7 liquidation, which is the worst possible result for the business, its creditors, its customers, and its owners. Conversely, if a business CAN be made profitable, we can almost always negotiate forbearances and payment arrangements with the creditors, which makes bankruptcy protection unnecessary.
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IRS to the Rescue -- Really!
Our office does not give tax opinions, but we are generally conversant with the special tax rules that come into play in an insolvency situation. We refer our clients to accountants knowledgeable in these matters for opinions and returns.
Many of our clients are entitled to "carryback" tax refunds. These are essentially amended returns for prior years in which a tax was paid, where recent years' losses are carried back and applied as though they had occurred in the prior years.
Many of our clients are entitled to "carryback" tax refunds. These are essentially amended returns for prior years in which a tax was paid, where recent years' losses are carried back and applied as though they had occurred in the prior years.
In one recent engagement, we saw that the client, the owner of a failed business, had overlooked his option to elect Subchapter S pass-through treatment for his corporations. He had paid a large tax at the personal level, all the while incurring business losses.
We were able to persuade the IRS to grant Subchapter S status retrospectively, and we then filed carryback returns for his loss years. This resulted in sufficient carryback refunds that enabled him to settle his personal guaranty liability and avoid personal bankruptcy.