Bankruptcy Bits

The Berman Hook Theory – planning the timing of filing bankruptcy

 There are statistics that evidence that a substantial number of Chapter 11 plans fail, and that even in cases in which a plan is confirmed, the reorganized debtor fails shortly after confirmation.

An explanation for the phenomenon is contained in a theory that has become known as "The Berman Hook." Envision a hook: a line straight down, a perpendicular line at the bottom with another line headed up. Think of a fishhook.

The Berman Hook Theory incorporates the previously expressed viewpoint that timing can be everything. Like "location, location, location," the manta is, "timing, timing, timing" for debtors.

The theory is simple: during the period of declining business, the entity survives by using its capital (cash, inventory, accounts receivable) and available credit to survive. Debt is incurred and continues to be incurred during the downturn and at the leveling off phase. The cash flow and capital crisis really occurs when the business turns around and new capital and credit are required for new inventory, (or to finance the production of new product,) and to finance the accounts receivable created by new sales. The real crisis occurs when capital is depleted, debt is the highest and demands for capital, cash and credit are newly needed. A classic scenario.

The theory suggests that the filing of a petition in bankruptcy provides little long term relief when filed in the downward spiral but is best exercised when there is a realty of a fresh start, i.e. when relief from existing debts can be most beneficial. A successfully reorganized debtor is relieved of the burden of incurring additional debt and has the opportunity to engage in business when there is an opportunity to succeed. A simple, pragmatic theory.

And the concept is equally applicable to individuals. Timing is everything. You should not seek recourse in Bankruptcy Court until you have bottomed out. By means of example, you’re best advised not to file before you have the operation and will be out of work for a prolonged time or are unemployed with no early prospect of employment. Timing can be everything.

While the theory is valid, there are, of course, unusual circumstances under which you don’t have the luxury of choosing the time.

by: Eugene B. Berman, Esq.

BAPCPA under review by Congress

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), the "Revised Code", is, once again, being reviewed by Congress. While the only amendment proposed in the current session - the granting of authority to the Bankruptcy Court to cram-down residential fist mortgages - was defeated in the House, there is under consideration a package of amendments seeking to undue and revise what some believe to be draconian provisions of the misnamed BAPCPA.

Only time will tell if amendments will "have feet" and if Congress will choose to consider one or more changes that are being bantered about.

One of the changes that has been proposed by the National Association of Credit Management ("NACM") would move the burden of proof for preference claims from the creditor to the trustee, meaning that instead of forcing creditors to defend themselves from these claims and having to prove that a payment is not preference, the Bankruptcy Code would be amended to require trustees to first prove that a payment was preferential before they file an actual claim.

By: Eugene B. Berman, Esq.

Timing is everything when filing bankruptcy.

We are all aware that the timing of the filing of a petition - voluntary or involuntary - determines the time frame within which preference, fraudulent conveyance, and other claims can be asserted. A debtor may well delay a filing to protect a purported preference to a "friend" or to avoid claims ascertain insider preferences. Or visa versa: a petition may be filed to preserve the 90-day preference period so that an action can be undertaken. The consequences of when to file is one of the major considerations to be addressed by any entity contemplating the filing of bankruptcy.

One of the considerations frequently overlooked by debtors and their counsel is consideration of the most auspicious time to file for them. It is suggested that all too often a debtor files prematurely...at a time that things are bad but will probably get worse. An individual should not file when he loses his job...he should wait until he gets a new job. A business should not file at the first signs of trouble, it should wait until there is the beginning of a turn around.

The lesson is to bottom out before seeking relief in bankruptcy.

By: Eugene B. Berman, Esq.

New trustee regulations regarding 341 non-English translation

When attending a 341 Meeting of Creditors with non-English speaking clients, the local practice dictated that the client bring their own translator (typically a friend or family member) to translate at the meeting. Under the U.S. Trustee’s recently implemented translator service program, this practice is no longer permissible.

Specifically, the protocol is to advise the Chapter 7 trustee that translation services will be needed prior to the 341 meeting. The trustee will then arrange to call a translation service phone number(in which 171 languages are available)at the 341 meeting so that an official translator will facilitate communication between the debtor and trustee.

This service provides accuracy and integrity to ensure that the bankruptcy debtor’s testimony is accurate and honest. In addition, it alleviates the need for debtors to involve a friend or family member in their personal financial affairs.

By: Justin H. Dion, Esq.