Watching over others

//October 27, 2009//

Watching over others

//October 27, 2009//

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Bankruptcy lawyer learns to make a living solving people’s problemsMichael D. Sirota is the kind of guy who tries to minimize debt in his personal life, but as a bankruptcy lawyer it dominates his professional life.

“I’ve seen too many good people and good businesses devoured by easy credit,” said Sirota, a 48-year-old co-managing shareholder in the Hackensack office of law firm Cole, Schotz, Meisel, Forman & Leonard P.A. Born in Paterson and the first member of his family to go to college, let alone to law school, Sirota is the go-to man for many firms in a financial hole.

“I think that bankruptcy, in general, is now part of the landscape, even in good times,” he said. “Of course, a law firm like ours is a bit busier during a recession like this one.”

Federal New Jersey district court records paint a stark picture: Chapter 7 liquidation filings jumped 56 percent to 24,762 during the 12 months ended Aug. 31, compared to the previous year, while Chapter 11 filings rose 28 percent to 421 cases.

As the co-chair of the firm’s bankruptcy and corporate restructuring department, Sirota has represented high-profile debtor companies like Adamar of New Jersey, better known as Tropicana Casino and Resort, Marcal Paper Mills and retailer Linens ’N Things.

In more than 20 years with the firm, Sirota said bankruptcies just keep getting bigger.

When a company takes on debt, it’s basically making a tradeoff: getting cash up front in exchange for a commitment to pay back the funds with interest tacked on. Borrowers may take on debt to acquire machinery, equipment or even other companies, believing that they’ll earn enough to pay off their creditors.

But if things don’t work out, bankruptcy lawyers get called to set things right. “At one time, a Chapter 11 reorganization used to involve a fairly conventional restructuring. The idea was to reconfigure the distressed capital structure [or debt], by stretching it out and giving the debtor company more breathing room” to regain its balance, he said.

But in today’s fast-forward, turbulent economy, creditors are not so willing to wait.

“Now we’re seeing more 363 sales,” Sirota said, referring to a federal bankruptcy code provision that may let a bankrupt company sell off its assets free of any claims or liens.

Both the Tropicana and Marcal bankruptcies were settled that way. “We’re also seeing more use of Chapter 11 to convert debt to equity,” he said. “Under this approach, secured debtors and bondholders become the owners of the debtor company.”

In Sirota’s eyes, a bankruptcy filing isn’t necessarily an indictment of management.

“A company may have taken on debt when the economy was good,” he said. “But today there’s a lack of credit, and many consumers are unable to spend, leading to a contracting market. So a business may not be able to handle its debt.”

At the same time, management isn’t off the hook. “Sometimes the top people get too comfortable with generating sales volume and don’t pay enough attention to core principles,” he said. “It’s always a good idea to review your business operations in the good times, so it’s easier to react in the bad times.”

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