If you run a business in Des Moines and the debt has gotten to the point where bankruptcy is on the table, you are probably wondering if you should file and, if so, which bankruptcy is best. You are stressed, you are behind, and now you are meeting with a stranger to discuss your biggest financial failure(s). Plus it’s easy to feel judged. At Delancey Street we are a business debt settlement company, not a law firm. We negotiate with funders and lenders for owners, but some owners are better served by bankruptcy. If a cheaper option exists or bankruptcy is the better path, we say so on the first call and refer owners to a vetted, independent bankruptcy attorney. If that is where you end up, go into the meeting with questions. Here are eight we would ask.
Which Chapter Fits Your Business
The first is whether you need a lawyer at all, and which chapter fits your business. While you can in theory file without a lawyer, it is inadvisable. This is complex stuff. Chapter 11 has more steps, procedures and terminology than you can master in a weekend. A good attorney can help you pick the right form of bankruptcy, and a lawyer can save you time (finding information, completing documents), and mistakes can be costly. Chapter 11 is only one option, and it is a serious decision. The chapters are quite different, and the right one will depend on your own circumstance and goals. Chapter 7 is a straight liquidation. As for Chapter 13, the difference is that Chapter 13 has debt limits and requires you to have a steady source of income from which you make your plan payments, and Chapter 11 has no debt limits and no income requirements.
Second, ask whether Chapter 11 is realistic for a business your size. A common misconception is that Chapter 11 is only for large corporations. That was largely true years ago, but no longer. Although it is complex, Chapter 11 works for small businesses as well. It is a reorganization of debt, or an organized shutdown. Sometimes the goal is for the business to emerge stronger and healthier, and other times the goal is an orderly shutdown. That second path can make sense especially with very aggressive creditors. To reorganize, the business must present a repayment plan, possibly with a restructuring plan; the court must approve it. The plan may modify interest rates, payment due dates or amounts, and in some cases it may erase debt entirely.
Third, ask plainly: will I lose my business? With Chapter 11, the answer is most often “no, you will not lose your business.” You can operate your business as normal while bankruptcy proceedings are underway. You do not need to sell any assets unless you want or need to sell them for a practical plan. Filing Chapter 11 triggers an automatic stay that temporarily pauses collections: payment demands, eviction, foreclosure, bank levies and property seizures. The idea is to give the business time to work out a repayment plan. Remember, filing Chapter 11 pauses collection on debts, but the bill still comes due.
Fourth, ask about the downsides. The two big ones are time and complexity. Putting together a plan and getting the court to approve it takes longer than other bankruptcy options. It sounds simpler than it is. You have to show why the business will be profitable once debts are reorganized. Chapter 11 can also be used to sell off assets and wind down in an orderly way, with the business in control rather than a Chapter 7 trustee. Ask your lawyer to give you a forecast and a schedule, and ask about what can go wrong, and how to avoid and mitigate the risks.
Fifth, ask whether you are eligible. It is open to individuals, partnerships, corporations and other entities. Individuals rarely file Chapter 11, though. If you are an individual, you must have done credit counseling in the 180 days before filing. You must list your current income and expenses, a schedule of assets and liabilities, your contracts and leases and a statement of financial affairs. You cannot file if a prior bankruptcy was dismissed within 180 days for failing to appear in court or obey a court order. There are some procedural traps that, if you fall in them, could keep you from filing. Ask for a clear, written list of what you will need to provide and when you will need to have it ready, and what documents you should begin to assemble.
How Much the Overall Bankruptcy Costs
Sixth, ask how long this will take and what it will cost. Most Chapter 11 cases take from six months to two years. The fees include $1,717 to file, but attorney fees are extra. When you sit down with the lawyer, work out a clear, written agreement on the costs so you don’t get a nasty surprise halfway through.
Seventh, ask what happens to your people, and who will find out. This question is often answered with good news: There is no direct impact on earned wages, but some employees may be laid off to cut costs. As for privacy, the documents you file become part of the public record. They contain a substantial amount of financial information, available to anyone who reviews the court files. Potential investors, suppliers, employees, customers or competitors might see financial details they’d rather keep secret.
Eighth, if you owe back taxes, ask whether they can be wiped out. The honest answer is that it depends on the facts of each case. If you complete your plan, you receive a discharge of certain debts, which means you are no longer legally required to pay the discharged debts. As for taxes, some may be dischargeable, depending on the facts and circumstances.
Before you walk out of that first meeting, make sure you know how much the overall bankruptcy costs: attorney fees, court costs and any other expenses. But cost should not be your only consideration; choose an attorney you trust and who feels right to you. Ask how you will keep in touch while your case is in progress, when and how often you may expect updates.
For some owners, these pros and cons suggest Chapter 11 is the way to go. Others are better served by Chapter 7 or 13, or by the business debt settlement that is our specialty. Whatever path you take, the first thing to do is get information so you can make an informed choice. At Delancey Street, we can assess your situation and see whether you can address your debts through a negotiated settlement. It costs nothing to know your options.
