DISTRESS SIGNALS THAT YOUR BUSINESS IS IN TROUBLE

As anyone who has ever started their own business will attest, there is a huge financial risk involved.  Typically, small business owners invest their own money, or they will seek a bank or SBA loan to provide start-up capital for the business.  On the other side of the risk involved, are the substantial rewards that many entrepreneurs seek when starting a new business.  They get to be in control of their work environment, set their own work/life balance and reap the financial rewards that often come from being able to manage their own company.

But what are small business owners supposed to do when revenues are down, and their expenses are going up from having to change their operations in the middle of a worldwide pandemic?  The key to survival during these difficult economic times, is being able to identify the signs of financial distress and to determine whether the company can manage its business without having to file bankruptcy.

CASH FLOW or LIQUIDITY

Obviously, if the company runs out of cash, then it will be difficult to continue to operate.  So, it is imperative for business owners to monitor their income statement to ensure that the company is operating in a positive cash position each month.  If cash flow is negative for a sustained period, it usually means that the owners or shareholders will have to invest more of their money or borrow on a line of credit to keep operating.

If a company is liquid, it has enough assets in cash to make payroll and pay immediate bills.  If a company is unsure if it will have enough cash to operate 30 days out, then that is one of the distress signals that may lead the owners to consider alternative measures to generate cash, such as liquidating inventory or factoring receivables.

DECLINE IN REVENUES

Poor sales growth could indicate a lack of consumer acceptance of the company’s product or services.  If sales are slow, then the company may be forced to sell its product or service at a loss to sustain its business.  Reviewing a profit and loss statement each month will show sales revenues and enable a company to chart whether sales are growing or declining.

POOR PROFIT MARGIN

Poor profits are usually the first sign that the business is not doing well.  If the profit margin is low or declining each month, then that means the business expenses are too high or the company’s sales are poor.  When a business struggles to earn profit, business owners will often have to ask themselves whether it is worth continuing to funnel more of their own money into the business just to make ends meet.  If a company is forced to raise money externally, it will raise its business risk and lower its creditworthiness with creditors, suppliers, investors, and banks, eventually limiting access to outside funding.

DEFAULTING ON PAYMENTS OR EXTENDING PAYMENTS

If a business is delinquent on payments or has to continually ask for more time to make payments, it hurts the company’s reputation and suppliers, or other critical vendors could force the company to change its payment terms to cash-on-delivery (COD).  Trying to do business on COD will put extra pressure on the company’s cash flow.

Also, if the company is having to extend longer payment terms to its customers for its receivables, the business will likely start to feel the cash crunch as well.  Customers who are paying slowly should be notified immediately, particularly when the company depends significantly upon one or two major customers.  In this situation, the risk of financial distress becomes even greater.

ADVERSE COMMUNICATION FROM BANK OR LENDER

Falling behind on payments with a secured lender or bank will usually result in diminishing the relationship and good will that the company developed when the loan was initiated.  The lender may ask for additional security or personal guarantees of related third parties when the company seeks additional funding.  Keeping open lines of communication is paramount to furthering the company’s banking relationship and enhancing its opportunities for additional financing during times of financial distress.  If the secured lender sends a notice of default, it usually means that communication has eroded, and the company will have to look for other avenues to bring the lender current.

EMPLOYEE TURNOVER

Changes in senior management and in employee turnover tend to be an early warning sign that a business is in trouble.  Each industry will have specific challenges, so business owners will need to monitor employee turnover to determine if the layoffs are tied to financial cutbacks or some other strategic reason.  The bottom line is that businesses in financial distress are rarely happy, which means employee moral may be low and upper management may be on edge and stressed about job performance.

If a significant division of the company decides to leave or join a competitor, the company will need to reassess its profitability and whether it can sustain the loss of key employees or find others who can step into their roles within the company.  Either way, employee turnover is a signal of financial distress.

CHANGES IN THE MARKET

Small businesses need to be watching for any downturn in the economy.  It is not always as easy to see as a worldwide pandemic.  But, losing a critical customer or a principal supplier can adversely affect company sales.  Any of these factors combined with the appearance of a strong competitor or an unexpected shift in consumer spending habits could put serious pressure on a company’s revenues and profitability.

SOLVENCY

One of the key measures of a company’s viability is its solvency.  A business is solvent if it has enough assets to cover its liabilities.  Solvency is measured with a business ratio called the “current ratio’ that compares current assets (receivables, supplies and inventory) to current liabilities (taxes, payroll and monthly debt service).  The “current ratio” is supposed to be 2:1, meaning the value of a company’s current assets should be twice as much as its current liabilities.  If a company can maintain this ratio, it can handle emergencies and pay its bills over a short period of time.  Failure to maintain this ratio will likely lead a company into financial distress.

While it may seem obvious to measure financial distress by a lack of cash to operate the business, many warning signs are present well before a company is forced to shut its doors. Once a company finds itself in financial distress, it should develop a proper course of action to address the issues at hand.

If you are struggling to pay your debts and concerned about the future welfare for you and your family, it is important that you seek the advice of a bankruptcy lawyer to ensure that your assets are protected and the debts you seek to eliminate are dischargeable.  Our attorneys have been assisting consumers and business owners with bankruptcy matters for over 25 years.  If you are considering filing for bankruptcy, please consider contacting the Nomberg Law Firm.  Our office number is 205-395-0532.

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Steven D. Altmann has been a lawyer for more than 25 years. Steve has earned an AV rating from Martindale-Hubbell’s peer-review rating and was recently named a Super Lawyer and Top Attorney by Birmingham Magazine in the area of Bankruptcy Law.

We are a Federal Debt Relief Agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.

from The Nomberg Law Firm – Birmingham Workers' Compensation & Personal Injury Lawyers https://www.nomberglaw.com/blog/distress-signals-that-your-business-is-in-trouble/

CAN I AVOID A JUDGMENT LIEN THROUGH BANKRUPTCY?

A LIEN is one of the more contentious and difficult concepts to understand in the world of Bankruptcy.

The legal term LIEN refers to a form of security interest granted over an item to ensure that the owner of that item pays their debt. The process of putting a lien on someone’s property (most often their house) can be done in several ways. The first way is where you take out a loan to purchase an item and you sign something saying that you agree that they have a security interest in the item. This is called a PURCHASE MONEY LIEN. A good example of this is a car title loan. The Bank lends you the money and in return, you agree to give them a lien on the title to the car. On the other hand, if you borrow money and give the lender the title to your car or pledge other assets of yours as collateral for the loan, you are giving them a NON-POSSESSORY NON-PURCHASE MONEY LIEN. This means, the lender has a lien in the property that you continue to possess, but the lender did not finance your purchase of this property.

Another way a creditor can get a lien on the property is by filing a lawsuit against you, obtaining a court order and recording it with the probate office of the county in which you reside. This is called a JUDGMENT LIEN. The fourth type of lien is called a STATUTORY LIEN. Some examples of a statutory lien are tax lien, mechanic’s or contractor’s lien, landlord’s lien or hospital lien. There are specific Federal or State statutes that govern how these liens are created and who can claim them to secure the payment of debt.

Bankruptcy law treats creditors who have liens differently than other creditors. Creditors who have a lien are “secured creditors”. In most cases, creditors’ liens are not affected by bankruptcy. In other words, the liens survive bankruptcy. So, if you have a home that is secured by a mortgage, you can bankrupt against the underlying promissory note and not pay anything else owed on the note. However, the mortgage still attaches to your house. So, if you don’t continue to make your mortgage payments, the mortgage lender can foreclose on the lien and take your property. The same thing goes for your car.

With most purchase money or consensual liens, you either want to keep the collateral or surrender it to the lender. If you surrender the property, then most likely, you will not owe anything else to the lender. If you want to keep the property, you will want to enter into a Reaffirmation Agreement with the lender saying that you will continue to make the contractual monthly payments and be responsible for the balance owed to them.

The contentious aspect of liens comes more into play with judgment liens. This is usually true because in most instances, you disputed the debt before it ultimately became a judgment. One of the most powerful tools of bankruptcy is that you have an opportunity to avoid judgment liens and keep them from attaching to your property.

 

HOW CAN I AVOID A JUDGMENT LIEN?

 

The keys to being able to avoid a judgment lien are knowing when the judgment lien was recorded and determining the value of the property to which the judgment lien would attach.  

To be effective against someone who files for bankruptcy, a judgment lien must be filed more than 90 days before the bankruptcy case was filed.  Judgment liens filed within 90 days before the bankruptcy is filed are subject to being avoided as to the full amount of the judgment regardless of the value of the property.

If the judgment is recorded more than 90 days before the bankruptcy was filed, you can file a Motion with the Bankruptcy Court asking the Court to avoid the judgment lien as to property that you own if the lien impairs your exemption in that property.  For example, let’s say someone has a judgment against you for $100,000 and you own a house in Alabama that is valued at $50,000.  If you can claim your homestead exemption of $15,500, this only leaves $34,500 of value in the property for the judgment lien to attach to.  So, you can bankrupt on the underlying debt and eliminate $65,500 from the value of the judgment lien against your home.  But, if you want to remove the judgment lien from your home, you will need to make arrangements to pay the creditor something to satisfy the balance of the judgment.           

The lien concept is a very complicated one.  It is important that you discuss these things with an experienced bankruptcy attorney who knows how to deal with liens in your bankruptcy case.

If you are struggling to pay your debts and concerned about the future welfare of you and your family, it is important that you seek the advice of a bankruptcy lawyer to ensure that your assets are protected and the debts you seek to eliminate are dischargeable. Our attorneys have been assisting consumers and business owners with bankruptcy matters for over 25 years. If you are considering filing for bankruptcy, please consider contacting the Nomberg Law Firm. Our office number is 205-395-0532.

 

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Steven D. Altmann has been a lawyer for more than 25 years. Steve has earned an AV rating from Martindale-Hubbell’s peer-review rating and was recently named a Super Lawyer and Top Attorney by Birmingham Magazine in the area of Bankruptcy Law.

We are a Federal Debt Relief Agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.

from The Nomberg Law Firm – Birmingham Workers' Compensation & Personal Injury Lawyers https://www.nomberglaw.com/blog/can-i-avoid-a-judgment-lien-through-bankruptcy/