Bankruptcy process and the role of CPAs — pre, during and post proceeding
A bankruptcy process can be overwhelming, especially without the support and assistance of committed professionals who are also willing to create lasting bonds with their clients. If you are an individual or a company under financial duress, there are options to reorganize your debt and get back on track.
The U.S. Bankruptcy Code allows individuals, corporations and other entities to file a petition with the bankruptcy court. Each type of bankruptcy is usually referred to by its chapter in the U.S. Bankruptcy Code, and the procedures are governed by the Federal Rules of Bankruptcy Procedure.
How to know if you might need to file for bankruptcy
The bankruptcy process is usually preceded by a period of insolvency. This is what CPA Doris Barroso-Vicéns calls “root for duress.” The insolvency period includes:
- Incubation period — The following situations may trigger the beginning of the incubation period: change in product demand, increase in overhead costs, obsolete production methods, increase in competition, incompetent management, improper location, client loss, tax problems, accidents, legal adversary results, acquisition of unprofitable subsidiaries, over-expansion, incompetent credit, collection issues and poor communications with stakeholders.
- Cash shortage — The business becomes unable to meet its current obligations. Assets are not liquid enough and capital is tied to accounts receivable and/or inventories.
- Insolvency — The business is unable to obtain funds to meet maturing and overdue obligations through customary channels.
- Total insolvency — Total assets are less than total liabilities. Business is unable to obtain financing to fund its operations. Its only available alternatives at this stage are bankruptcy or out-of-court workout.
Types of bankruptcy
If you are an individual, your accountant will inform you that Chapter 7 and Chapter 13 are the two types of bankruptcy available to you. Under Chapter 7, the filing party requests a liquidation process for individuals or corporations. In this process, eligible assets are liquidated or sold to pay off creditors.
However, if you receive regular income but cannot manage to repay all your debts, you are allowed to keep your assets, but are required to set up a plan to repay your creditors. This is also known as a “wage earner’s plan.”
Filings under Chapter 13 seek a reorganization of consumer debts and it is available to individuals, couples or personal family business (not incorporated) that project a regular future income and whose debts do not exceed certain limits.
Reorganization for corporations or high-net-worth individuals is available under Chapter 11; reorganization for “family farmers” or “family fishermen” with regular annual income is available under Chapter 12.
Small businesses have the option of Subchapter 5, which is available within the established limit, with aggregate non-contingent liquidated secured and unsecured debts.
Contact your attorney and a CPA experienced in bankruptcy before taking any of these actions: repaying your suppliers other than in the ordinary course of business, repaying any money to related parties, withdrawing funds from your retirement accounts to repay debts without discussing this with your attorney, transferring assets (such as real estate, cars, money or anything of value) to family or friends, financing a new vehicle or equipment just before filing your case, using your credit cards or acquiring new debts or ignoring any lawsuit that is filed.
At RSM Puerto Rico, we are delighted to guide you and provide professional advice before, during and after the bankruptcy process to give your company a chance at a fresh start. We are confident that our advice will help you to Restructure your financial position, keep up with your Strategies for a fresh start and manage the bankruptcy process.
Among the services provided to our clients, we:
- Assist debtor’s management to evaluate operational problems, financial condition, market condition, and internal and external trends.
- Financial statements preparation, including compilation, review and audits.
- Perform solvency test, including analysis to identify the root cause of the insolvency.
- Perform liquidation test.
- Prepare projections and forecast.
- Provide business advice to turn around and restructure the business.
- Assist the debtor to gather financial documents, including proof of income, bank statements, two years of taxes, mortgage statements, consumer debts statements and credit report.
- Provide tax advice to comply with regulatory agencies and minimize the tax impacts.
- Assists in out-of-court negotiation with creditors.
- Provide assistance with classified debts (secured, priority or unsecured).
Furthermore, we provide the following services during the bankruptcy process:
- Prepare or review monthly and quarterly operating reports required by the bankruptcy court.
- Review claims and reconciliation of proof of claims.
- Prepare or review of the debtor’s projections and forecast.
- Perform analysis of profitability of debtor’s operations.
- Perform liquidation analysis as required by court.
- Assist in the development or review of plan of reorganization or disclosure statements.
- Provide record keeping.
- Perform tax oversight.
- Perform fraud examinations.
- Compliance audits
- Business valuations
- Provide forensic accounting.
- Act as a professional witness in proceedings.
Additionally, after the bankruptcy process, we will:
- Assist in adopting fresh start accounting.
- Prepare financial statements, including required notes.
- Perform compilations, review and/or audit procedures.
- Provide tax advisory.
- Monitor implemented strategies.
- Keep lasting bonds.
At RSM Puerto Rico, your financial counsel will guide you to understand your current financial conditions. Contact us at 787-751-6164 for an orientation.
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