Bankruptcy - What you need to know about preferences
The current economic climate is not great. The country is in a recession and credit markets are getting really tight. Even if your business is rock solid and your revenues have not been effected by the change in consumer behavior, you still might get hit with bankruptcy problems. Do you know what your risks are if one of your customers goes bankrupt?
If your customer pays you in an arms length transaction within 90 days of declaring bankruptcy, you may be required to return that payment to the trustee. Not only that, but the trustee has up to two years to reclaim that payment. This is defined in Bankruptcy Code §547.
Example, you sell a carton of widgets to ABC Store for $10,000. Thirty-five days later (about 10 days after they normally would have paid), ABC Store pays your invoice. Thirty days after that, ABC Store goes bankrupt. If you don’t have any outstanding invoices, you might not even know. A year and a half later, the appointed trustee demands the $10,000 back. Is this valid and legal? Yes, it is, and without an accepted defense, you will be required to return the $10,000 and file a claim against the debtor.
Defenses to the recovery of a preference are found in 11 U.S.C. 547(c). They include:
- cash transactions such as COD ( contemporaneous exchanges);
- payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms (i.e., the payment is not made late);
- security interests that secure debts that bring new value to the debtor (you get paid, then you send the goods); and
- amounts of subsequent credit extended and unpaid (you send more widgets after you were paid).
These defenses have to have occurred before the customer declared bankruptcy and must be raised in an answer to a preference complaint. It is up to you to provide the proof that the defenses are valid.
So how can you protect yourself?
Once the customer has declared bankruptcy, you can only gather your documentation and find a good bankruptcy lawyer. However, if you suspect that a customer is having financial trouble and may go into bankruptcy, you should immediately contact a bankruptcy lawyer to determine what actions you can take to protect any payments that you have already received.
Using Your 401k to It’s Fullest Advantage
Historically, your retirement savings were comprised of three legs: social security, pension, and personal savings. The belief was that these amounts would be equal and would replace a certain percentage of your working income to provide you with enough money to sustain your lifestyle after retirement.
Somewhere along the way in the last twenty or so years, companies realized how expensive it was to provide a defined benefit plan (meaning you were guaranteed a fixed sum per month upon retirement). Improved healthcare means retirees are living longer than was expected when the plans were originally set up.
With pressure from Wall Street and general economics, companies began cutting these plans in favor of defined contribution plans (meaning the company will put some amount in, but will not guarantee what will be there when you retire). The best known defined contribution plan is the 401k plan.
By switching from a pension to a 401k plan, the company saves significant money, but places the onus of saving for retirement entirely on the employee. At the same time, the savings rate of Americans has dropped from the 8-10% rate seen in the 60’s and 70’s to 1.2% in 2007.
What this means is that most people have no savings and no idea whether their 401k will cover their retirement or not. Let’s say you are retiring next year (at 66) and you have averaged $65,000 per year for the last thirty five years. You will receive about $22,000 in social security.
To make up the difference, you will have to have $43,000 per year to maintain the same standard of living. Ignoring inflation, if you expect to live another 17 years, you need $731,000. Saving that amount of money is hard, but it can be done.
A great place to start is the 401k offered by your company. In 2008, you can contribute up to $15,500 each year and at most companies, that amount is matched at a certain percentage rate. If you were able to do this for twenty years, you would have the money you need for your retirement. This is due to compound growth and the fact that your retirement funds grow tax-free.
Don’t miss out on this great benefit. Chances are you are already enrolled. The Pension Protection Act of 2006 encourages employers to automatically sign up their employees. All you need to do is start your contributions and you will be on your way to a fiscally healthy retirement.
When Your World Gets Shaken
If you are a regular reader, you’ve probably noted that the posts have been a little spotty recently. Hopefully, since my life has calmed down a little, I will resume daily posting. It has been a busy couple of weeks.
One client has a board meeting which involved a full day of prep. Another has a business plan that needs completing, and another needs immediate consulting services around an upcoming event. Plus we had house guests and our babysitter graduated from college and moved away. Ugg.
This sort of week will happen to every entrepreneur sooner or later. Try to roll with it.
- Remember, cash is king. When you get busy, don’t let that affect your cash flow. Don’t neglect sending out invoices or following up on overdue accounts receivable. Don’t forget to pay your rent or utilities.
- Ask for support. If you need to work late, ask your spouse to take on the load with the house and the kids. Ask your staff to take on tasks that they can do that you don’t have time for.
- Get enough sleep. When you are stressed and working double time, it’s easy to stay up late to get work done, but you will pay for it the next day if you are dragging.
- Avoid bad habits and eat healthy food. For a week, you can skip alcohol or fatty foods. This can give your body the extra energy you need to make it through the week.
- Plan time in the future when you can get to any of the things you have neglected. Then they won’t nag on your mind while you are completing the important stuff.
Being an entrepreneur will take you through a series of ups and downs on practically a daily basis. Work hard to stay on an even keel while you steer your business through rocky waters.
Venture Capital Carnival - Vol. 5
This month I still received a lot of submissions that were not technically within the carnival topic; however, a lot of the submissions were relevant to startup and venture backed companies, so I added a section at the end on general business advice.
Joshua C. Karlin at Marketing & Fundraising Ideas submitted How Not to Ask for a Major Gift.
Jose DeJesus MD presents Business Loans - How to Get Funding for Your Business posted at Physician Entrepreneur.
Herrera at Life, Money & Development submitted the 7 Attributes of Leadership.
That concludes this edition. Submit your blog article to the next edition of venture capital using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.
Board Meetings - What to Accomplish
Board meetings for a private company are meant to gather the board of directors periodically to discuss high-level corporate strategy issues. Your board of directors should be a group of five to seven knowledgeable business people who have experience in your business.
When you get together, ask your senior officers to prepare reports that detail the information that the directors would need to make decisions on the direction of the company going forward or to correct or assist in correcting problems that have come up on the past.
In addition to metrics on their divisions, the senior officers should provide a list of items of interest from the past period, what they plan on doing in the next period, and what threats they see to accomplishing their goals. This will allow the directors to discuss whether they think the company is heading in the right direction as a whole.
If you do not have a board of directors, a monthly or weekly meeting with your senior management should accomplish the same thing if they bring you the same information. However, if you are interested in growing the company significantly, you should consider building a board of directors so you have the advice you need to take the company to the next level.
