How Would You Advise Financially Struggling Closely Held Corporations In 2021?
I would advise closely held corporations to call somebody like me, of course. I have been representing a wide variety of debtors, from sole proprietorships to LLCs (though I’m old fashioned and prefer corporations), for over 40 years. I don’t charge anything to sit down with people and review their financial situation. I happen to enjoy schmoozing and with chatting with them, I can get a good sense of where matters stand, make an assessment and develop a strategy to deal with their financial problems along with lots of schtick (many tell me after our consultation that a weight has been lifted form their shoulders). I would to offer them what I call a “Financial Well Being Audit.” No, it’s not like sitting across from some revenue agent as s/he goes through your tax return line by line approving some parts, disapproving others. What my “Financial Well Being Audit” entails is an in-depth analysis of their assets, liabilities, both business and personal, to determine where they stand now and where they would stand if the world ends, and by that I mean the business fails. In doing that, I hope to be able to button up their financial situation so that they can survive the worst and benefit from the best. I always hope they never need it, it’s best to prepare for the worst far in advance.
On the other hand, if they do, it’s there. If friends and family have lent money to the business, why should they take a back seat to the business’s general creditors? When banks make loans they demand collateral rarely making loans on an unsecured basis. Friends and family that have lent money to your business are no different. It never hurts to make a friend or family member who has actually lent money to your business a secured creditor on the assets of your business. It never hurts to have a friendly creditor on board. Moreover, there are time constraints on the timing and validity of the secured debt you are creating. The creation of legitimate secured debt is easy, but to survive a Chapter 7 Trustee’s inquiry it needs to be backed by an actual advance of money. I can put as many liens on the company as the client wants. They could sign promissory notes up the wazoo, but it has to pass muster. If there is a $40,000 promissory note, somebody may inquire whether there actually is a $40,000 payment that is backed up by that note. You’ll need to show that there was a check that was negotiated.
When you are a closely held corporation, it’s never too late, even if the money was lent five or six years ago. There are different categories of secured debt when you create them. If a friend lent you money, they only have 90 days before their security agreement becomes copacetic. If you borrowed money from your father, uncle, or brother, a year has to pass before it can pass muster. However, you’d be amazed at how quickly time flies. You are much better off doing this inquiry now and tightening things up than when something hits the fan.
What Questions Do You Want Potential Clients To Have When They Come To You?
Clients should put together a balance sheet for their business that includes assets, accounts receivable, and equipment. They should also have a ledger on liabilities, detailing secured debt and tax debt (i.e. IRS, MA/DOR and MA/DUA). Then, I just need a lump amount for unsecured debt is also necessary to know what we are dealing with. Along those lines, it would be helpful to have a breakdown of their personal assets. Do they own a home? How much is their house worth? What are the mortgages secured by the house? How much personal debt do they have in addition to the business debt?
When asking about mortgages, I want to know how much is owed on the mortgage, not what they pay every month. Also, I’d like to know if they’ve recorded a homestead. The homestead is very important in Massachusetts because it can protect up to half a million dollars’ worth of equity in real estate. If you are 62 or older, it protects up to $1 million in equity. If you file a bankruptcy and the house is listed as an asset, the recording of the homestead will result in the Chapter 7 trustee having no interest in it. By recording the homestead, you can benefit from it.
I can have my client take advantage of the homestead by recording it at the registry of deeds while on my way to filing the client’s bankruptcy. However, now the recording is done by mail and the bankruptcy is done electronically. But as long as that’s on the record first, you are good to go.
I like talking to clients about the numbers. I don’t need them to go mishugah looking at this stuff. I can ask these questions myself. The only other thing of concern would be cars. Does the business own vehicles? Do they own personal vehicles? Are they financed? Are they leased? By knowing, I can get a handle on whether anything needs to be tightened up such as the recording of a homestead.
In these pandemic times with all business endeavors uncertain, it would be best for every closely held corporation to determine the downside now, rather than waiting until matters get worse.
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