When Debbie Dawson started her business 12 months ago, she estimated that it would be profitable within 8 months. That is not what happened. During the first 6 months, she lost $18,000; during the next 6 months, she lost an additional $14,000. Debbie believes that the business is going to get better during the next 6 months and that she will be able to break even by the end of the second year. However, her creditors are not sure. Debbie’s business owes the two largest creditors a total of $48,000. The others are owed a total of $38,000.

Debbie believes that, if she can postpone paying her creditors for a period of one year, her company will be strong enough to pay off all of its debts. On the other hand, if she has to pay the creditors now, she will be too weak financially to continue and will have to declare bankruptcy. “I really think it’s in everyone’s best interest to give me 12 months of breathing room,” she explained to her husband. “If they will do this, everyone is going to come out on top. Otherwise, we are all going to take a financial bath.”

Debbie has considered broaching the subject with her two major creditors. However, she is not sure whether this suggestion would be accepted or would be used as a basis for their bringing legal action against her. “If they think I am trying to stall them, they just might demand repayment immediately and force me into bankruptcy,” she explained to a close friend. “Of course, if they see things my way, that’s a different story. In any event, I’m reluctant to pursue this line of action without talking to my attorney.”

Debbie hopes she and her attorney, Juan, can work out a plan of action that will prevent her having to declare bankruptcy and liquidate the firm. During her phone call to set up a meeting with Juan, she comments, “If everyone remains calm and looks the situation over very carefully, I think they’ll agree that my suggestion is a good one. After all, I’m not asking them to put any more money in the business, so the most they can lose is what they are owed currently. On the other hand, if they force my hand, they’ll probably be lucky to get 40 cents on the dollar. If they wait, they could end up with all of their money. All I’m asking for is a little breathing room.” Juan suggests that they meet later in the week to talk about it. “I’m sure we can think of something,” he tells her.

QUESTIONS

1.      What type of bankruptcy agreement would you recommend? Why?

2.      Why would you not recommend the other types of bankruptcy? Be complete in your answer.

3.      When selling the creditors on your recommendation, what argument(s) would you use?