Behind The Curtain—Chapter 11 From The Inside—Chapter 6—Financial Information

The prior chapter of Behind The Curtain can be found with the following link:

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 5-The Automatic StayBy Robert Bovarnick

Remember, in Chapter 2, when Brett said the biggest surprise of the Chapter 11 process was the volume of financial information that he had to provide? Here is where we get to the heart of the matter. This can be divided into three categories: financial documents filed when the case is first filed; Schedules and Statement of Financial Affairs; and monthly operating reports.

First are the financial documents that are filed with the petition. Second, are the Schedules and Statement of Financial Affairs. The Schedules are a snapshot of what Brettco owned and what it owed as of the petition date. The Statement of Financial Affairs (called the “SOFA”) is a series of questions about the state of a company’s finances, recent financial transactions, and items that don’t fit in the Schedules. The third is the monthly operating report, which is filed at the end of each month that shows the activity from the prior month. This will be addressed in a later chapter.

The Bankruptcy Code requires that a “small business” file, either with the petition or within 7 days, (a) the most recent balance sheet, statement of operations, cash flow statement, and federal tax return. If the company doesn’t have some or all of those documents, it has to file a statement that those documents have not been prepared. Pretty simple.

As simple as the filing of the initial financial documents is, the filing of the Schedules and SOFA is significantly more involved. While there are 10 different Schedules (A-J), only 7 of them apply to Brettco. Briefly, they are as follows: A/B—real and personal property; D—secured creditors; E/F—priority and unsecured creditors; G—executory contracts and leases; and H—co-debtors (C, I and J only apply to individuals).

When Jeff first explained the forms to Brett, he said he was overwhelmed. Then he took a step back and realized two things. First, most of the information was in Quickbooks. Second, Brettco’s accountant, Larry Calculer, CPA, would be really helpful. Brett said that one of the best things he did was to make sure his accountant was an integral part of the process. Brettco had the Bankruptcy Court enter an Order authorizing the employment of Larry to make sure his firm would get paid.

The other piece of advice that Brett remembers is Jeff told him not to guess. If there was something he did not know, it was better to say Brettco did not know it, rather than guessing. As soon as Brett finished looking at the forms, he called Larry and sent the forms to him. Larry was able to get the information together and helped in filling out the forms.

Schedule A/B covers real estate and personal property. Here, Brettco will need to list the following; cash and cash equivalents (such as money markets and brokerage accounts; deposits (such as security deposits); accounts receivable; investments; inventory (for this Brettco will need to provide a breakdown of raw materials, work in process and finished goods); furniture, fixtures and equipment; vehicles, machinery and equipment; real property; and intellectual property (including not only things like copyrights, trademarks, and patents, but also internet domains, licenses, and customer lists). Not everything applies to Brettco. Since it doesn’t have any patents or trademarks and its internet domain has very little value, it will be listed either as $0.00 or unknown value. For everything else, Brettco will need to list the current book value and the valuation method. Brettco was concerned that it did not have precise information. Jeff told Brett not to worry, that what is needed is the best information that Brettco has.

Schedule D covers secured creditors. For this Schedule, Brettco will need to list each creditor that has a claim that is secured by something. For example, Hequip will be listed, together with the piece of heavy equipment. Brettco will need to list the amount it owes Hequip and its best estimate of the value of the equipment. While Brettco had not performed any type of valuation on the equipment, as the owner, it had an idea as to what the equipment was worth.

Schedule E/F covers creditors who have unsecured claims. This is all of the creditors who are not secured creditors. This is divided into two sections. Schedule E is for priority creditors, primarily taxes. In addition to listing the creditor and the amount that is owed, Brettco will also need to list the amount that is entitled to priority status. Since this may not be known, it is common for this to be listed as unknown. Schedule F is everyone else. In addition to the name and amount, Brettco will also need to list whether the claim is contingent, unliquidated, or disputed. This becomes very important when it comes time for creditors filing proofs of claim.

Schedules G and H are pretty straightforward. Schedule G requires Brettco to list all of its contracts and leases, explaining what each is for. Schedule H asks Brettco to list any co-debtors. This means someone liable for any of Brettco’s obligations, such as any personal guarantees signed by Brett.

The second part of this marathon is for Brettco to prepare the Statement of Financial Affairs. This is a series of 32 questions. Some are pretty easy to answer and some took some time for Brett to look into Brettco’s books and records. Among the questions that are needed to be answered are the following: gross revenues for the current year and the two years before that; non-business revenue (such as money from lawsuits); payments made to creditors within 90 days of the bankruptcy, the aggregate of which is more than $6,825.00; payments made to an insider for the year before the filing; all lawsuits, whether Brettco is the plaintiff or the defendant; payments made related to the bankruptcy case (such as the retainer Brettco paid to Jeff); any transfers made by Brettco within the two years before the filing; names and addresses of financial accounts; other businesses in which Brettco has an interest; contact information for people who have Brettco’s books and records, as well as contact information for anyone who did any audits in the two years before the filing; whether any inventories have been conducted; contact information of all people in control (such as officers, directors and general partners); and any payments made to insiders within 1 year before the filing.

A lot of this, such as the payments made within 90 days or, as it applies to insiders, 1 year, has to do with potential “preference claims” that can be brought by the trustee (more on that later).

Once Brettco finalizes the Schedules and SOFA, Brett will sign a declaration, under oath, stating that everything is true and correct to the best of his knowledge. They are then filed. Once they are filed, they are available for anyone to look at.

Next, on to the first meeting with the Office of the US Trustee.

Earlier chapters of Behind The Curtain can be found at the following links:

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 4-First Day MotionsBy Robert Bovarnick

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 1By Robert Bovarnick

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 2-The Initial MeetingBy Robert Bovarnick

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 3-PrefilingBy Robert Bovarnick