Business Chapter 11 filings and reorganizations are booming

TAMPA -- Bankruptcy lawyer Buddy Ford works six to seven days a week now and ramped up his staff in an attempt to keep up with caseloads.

Not only is he filing more Chapter 11 bankruptcy petitions, some are for venerable companies that never had financial problems.

"My business Chapter 11 cases have doubled compared to last year," Ford said. "Many of them are related to foreclosures. It's just the domino effect of the subprime mortgage situation."

Statistics for the U.S. Bankruptcy Court for the Middle District of Florida in Tampa reflect the trend Ford and other bankruptcy practitioners are experiencing.

As of April, year-to-date bankruptcy petition filed in the district totaled 12,448, compared to 7,261 during the same period in 2007.

There were 59 Chapter 11 filings during the first four months of last year. As of April 2008, 118 Chapter 11 petitions had been filed.

Chapter 11 of the bankruptcy code allows corporations, partnerships and certain individuals to reorganize without having to liquidate assets and stay foreclosures. Chapter 11 debtors have to file a plan to repay creditors.

A repayment plan must be accepted by creditors and confirmed by the court.

Assessing the possible routes

Ford, who handles Chapter 7 cases but specializes in Chapter 11 representation, analyzes a business' situation to determine whether that route or a Chapter 7 liquidation is more appropriate.

In a Chapter 7 case, a debtor's assets are liquidated by a trustee who distributes funds from the liquidation to creditors. Some property is exempt from liquidation.

"I look at cash flow and the business model and the debt-to-asset ratio to see if it is a [Chapter] 7 or an 11," Ford said. "I see if there is a viable means to reorganize and what type of debt a business has. I do a balance sheet test. A lot of businesses have already exhausted efforts to stay in business when they come to me."

Bankruptcy is not a cheap process. A Chapter 11 filing fee is $1,039, and the filing fee for a Chapter 7 petition is $299.

Retainer fees are much more. Ford said a minimum retainer fee is around $10,000 and fees alone may total $20,000.

"It's expensive to file for bankruptcy," he said. "Small mom-and-pop businesses can't afford to do it."

A fast track is available for Chapter 11 cases, which gets the process complete in six months compared to the traditional Chapter 11 process that takes eight months to a year, Ford said.

Generally, the "law of bigness" applies in bankruptcy cases, said Noel Boeke, a bankruptcy attorney at Holland & Knight LLP in Tampa.

Large companies generally fair better in Chapter 11, he said.

In a situation where a large company is "bleeding cash" and has a strategic buyer, it allows for "washing it through," Boeke said.

"It's a quick tool to give clean title to a buyer," Boeke said. "Chapter 11 is a very expensive process, so you've got to be able to save a business. It gives you time to figure out the problems or allows a quick sale of assets."

Economic conditions are forcing companies -- particularly ones related to construction -- into bankruptcy court, particularly in Florida, said Boeke, who is the president of the Turnaround Management Association.

Sometimes, however, bankruptcy is not the best way to solve financial issues, he said. A lot of lenders are trying to work through issues with businesses to save money.

Lenders have their work cut out for them.

"It's not just construction businesses any more," Boeke said. "Now we're seeing restaurants having issues."