Bottom Line
Bankruptcy: Both sides of the coin
How bankruptcy affects owner-operators depends upon where their names end up on the bankruptcy petition. Whether listed as debtor or creditor, there is always an economic impact on the small business trucker.

Some 1,100 owner-operators leased to Intrenet Inc.’s subsidiary carriers (Roadrunner Trucking, Eck Miller Transportation, Advanced Distribution Services and Roadrunner Distribution Services) felt bankruptcy’s sting when the company filed Chapter 11 in January. Not only were they left with no carrier lease, these truckers’ load settlements and escrow accounts became tied up in bankruptcy court. (See article on page 16.) Because owner-operators are generally listed as unsecured creditors, they may see little or no money from the bankruptcy. And it could be a long time coming.

Danger signals emanate from businesses headed towards bankruptcy, one being when payments become slower and later. If a business asks a creditor to take a partial payment today and more next week, cash flow is a problem, and bankruptcy may be coming. If you’re getting paid, but other creditors are not (or, if you’re stiffed, but others are paid), that’s another signal.

Once your broker, carrier or shipper files bankruptcy, you should be listed as a creditor, and the court should contact you concerning the proceedings. It is best to be proactive; call the court to make sure you are listed as a creditor. Once on the list, it’s a matter of time until you find out how much, or how little, you will receive from the debtor. The court will tell you when the bankruptcy is settled. If you have not been paid in full (a likely outcome), you can write it off your taxes as a bad debt.

On the flip side...
On the flip side of bankruptcy, owner-operators may find themselves as debtors looking for a “fresh start.” This phrase tends to be more what the debtor wants to hear than what really happens. Yes, the creditors are no longer calling, but the debtor is also left bereft of many of his former assets, and will probably find himself dealing “on a cash-only basis” for seven to 10 years. Rebuilding lost assets, and operating on a cash basis requires discipline and a constant eye on company cash flow. This may have an unfavorable effect on the ability to be competitive with companies that have access to credit.

While there are ways to re-establish your credit, be aware that it will be at least three years before a lending institution will consider you for credit on a major purchase, such as a new truck. Timing and the track record you establish after bankruptcy are of paramount importance.

You can apply for a home mortgage or car loan (more than a $1,000-limit major credit card) from a lender advertising loans to people with “less-than-perfect credit,” but be aware that these lenders charge a higher-than-usual interest rate. Make sure you know what you are getting into. If you get such a loan, be meticulous in your payments. Following a bankruptcy, you must keep your credit report pristine in order to re-establish a good credit rating.

Loan officers will take into consideration the severity and the cause of the bankruptcy. For example, the best case for re-establishing credit immediately following bankruptcy would be a case where catastrophic medical expenses resulted in debts that were almost, but not quite, offset by available assets. Bankruptcy caused by a divorce would come next. A total “meltdown” of management practices with over-extension of credit card debt, foreclosures and repossessions is the worst-case scenario, and credit is unlikely to be extended anytime soon.

Owner-operators can avoid bankruptcy by keeping a diligent eye on the bottom line. The best strategy to avoid bankruptcy is to recognize the danger signs in your own business before it becomes an all-out financial emergency. Here are some actions that can keep you from plummeting over the falls:

  • Set financial goals (both short- and long-term).
  • Keep a budget.
  • Economize with an eye towards value.
  • Increase cash flow.
  • Use credit with caution.
  • Maintain a good credit rating.
  • Keep your family apprised of your situation.
  • Recognize the signs of pending credit problems.
  • Establish a revised payback plan with creditors before their third “past-due” notice.
  • Ask creditors for “extensions” on debts to allow you to pay them off more slowly.
  • Come to a “compromise” with creditors with whom you have disagreements.
  • Use a debt consolidation service to handle outstanding credit card debt. These services consolidate your monthly payments to a single check; in some cases, interest and penalties will be forgiven.

by the Land Line staff

 

With all these “chapters,” shouldn’t there be a “book”?

Different types of bankruptcy are referred to as “Chapters” because they are outlined in different chapters of the federal bankruptcy law. Federal law determines who gets paid and in what order, but state law determines how the debtor’s property is divided amongst creditors.

“CHAPTER 7” is a bankruptcy in which the debtor lists debts and assets. If his assets are larger than his debts, the court will not allow the bankruptcy to stand, but instead will just sell off the assets and pay the debts. If the debts are larger than the assets, however, the debtor liquidates those assets not exempted by the court, and distributes the resulting cash evenly to his creditors. Generally, a Chapter 7 bankruptcy is fairly efficient, but creditors dislike it because it is rare that a creditor is paid in full.

“CHAPTER 11” is where the debtor reorganizes his business, sometimes with the supervision of a court-appointed trustee. The point is to keep the business operating, while negotiating with the creditors to pay over a period of time. The creditors generally have to wait longer, but probably will receive more money.

“CHAPTER 13” is similar to Chapter 11, but there are additional limits on who may file and the size of debt that qualifies. For example, individuals and married couples can file for bankruptcy under Chapter 13, but corporations cannot, and there are monetary limits: $350,000 in unsecured debt and $100,000 in secured debt.

July Digital Edition