On the surface, bankruptcy seems like the only option. After all, your business is on the verge of collapse. You have significant debt. Your cash flow has dried up. What’s there to lose? The reality is, the choice is far from black and white. There are alternatives to bankruptcy, and in New York they are worth a hard look before you file. Bankruptcy is expensive, and nearly everything about your business becomes a matter of public record. Lawyers almost always want significant retainers, and filing bankruptcy is time consuming. You don’t need to panic about going bankrupt just because your business is struggling. As a debt settlement company, we at Delancey Street find that sometimes the best thing you can do for your small business is to avoid bankruptcy instead of pursuing it.
Other Options
Before you consider any of these alternatives, however, you need to understand the nature of the problem and whether there is a fix. If your business is failing for reasons that are correctable, there may be other options. But if your problems are more serious, the best decision may be to close up shop in an orderly manner. Keep in mind that none of this will be granted on goodwill. All creditors expect to be repaid. To get ahead, you must be honest with your creditors - tell them what’s happened, explain what you are doing to resolve the situation. In practice that means accurate balance sheets, income statements, cash flow projections and a liquidation analysis showing what creditors would receive if the business closed.
The first alternative is an out-of-court workout, the option in the middle, where you go in for a negotiation with your creditor and hope to hammer out a mutually beneficial deal. Because you don’t need court approval, a workout usually takes less time and costs less money than a Chapter 11 reorganization case. But it works only if your creditors agree. In a workout, there is no statute that decides who gets what. The outcome depends on the relative bargaining positions and personalities of those involved and your creativity as a negotiator. It also takes time and patience. It may be too late to attempt a workout after several judgments have been entered against your business, a creditor has levied your bank account or your landlord has filed for eviction. Waiting until the last minute means there is no time for negotiations. You must put every deal in writing.
The second alternative is to go to your secured lender. The secured lender may have the most leverage against you, but it may also have the most to lose; lenders rarely want the collateral back. That being the case, the secured lender may agree to lower the interest rate, waive certain fees and penalties, give you interest-only payments for a while, extend the maturity date of the note, or expand the line of credit. That doesn’t mean that the lender doesn’t expect something in return, however. Forbearance is an agreement between a borrower and a lender that eases debt payments for a time. A forbearance agreement will often require you to acknowledge your default, reaffirm personal guaranties, and release claims against the lender. The agreement may impose a fee and/or require the business to meet certain financial benchmarks. When a borrower and a lender agree on forbearance, they should put the agreement in writing.
The third option is to hire a turnaround professional, also called a turnaround manager. The turnaround manager can help stabilize your business, assist your management team and produce realistic business projections. The turnaround manager can also negotiate new deals with your landlords and suppliers. Remember that, because a big national bank may expect to work with one of the big national turnaround firms, that might force you into hiring a national firm at a premium price. It may pay to look for a local turnaround manager, who will likely cost you less and, if he is well-known, may already have the ear of your landlords and suppliers.
In the fourth alternative, called a composition of creditors, you enter into an agreement with two or more creditors in which they each agree to accept less than full payment of their claims. In exchange, they will forgive the remainder of their claims and suspend collection activity as long as you continue to meet your obligations under the agreement. However, you need a very high percentage of your creditors to agree to enter into the arrangement. That is because many creditors won’t agree to take a big loss if other creditors don’t agree too. Since there is no automatic stay, you need an agreement that the creditors will not sue you. Compositions are used in some states, but not all, so check your local practice.
The fifth alternative is an assignment for the benefit of creditors, or ABC, and it is where New York stands apart. This procedure is similar to a Chapter 7 liquidation case, but it is a state law procedure. Here, the debtor chooses an assignee (usually an accountant, attorney, or turnaround specialist) to sell the assets and distribute the proceeds to creditors on a pro rata basis. This option is generally less expensive than a bankruptcy case and is less public. However, there is no automatic stay, and if the assets are sold at an undervalued price, the assignee’s sale can be challenged as a fraudulent transfer, particularly if insiders purchase the assets. New York has lagged behind many states in adopting and implementing modern ABC practices. A New York City Bar committee report has even suggested that New York’s ABC law is antiquated and infrequently used. If you operate in New York, check local practice with counsel before counting on an ABC.
The sixth alternative is receivership. The receiver is an officer of the court that takes charge of the property, manages it, and can sell it with the court’s permission. Receivership is not a lawsuit in and of itself. Rather, it is tied to a collection lawsuit or a foreclosure. A receivership is usually sought by a secured creditor, such as a mortgage lender. The advantage of a receivership is that the receiver can usually obtain court approval of a sale within a few weeks, while even a speedy bankruptcy sale usually takes several months. The best time to agree to a receivership is before anyone even goes to court.
No Automatic Stay
But if you decide to stay out of court, you should know there are risks. No automatic stay means a creditor can still seize your bank account, for example. And if creditors are unhappy with your business, they may file an involuntary petition on you, and deals made along the way could then be unwound. Creditors who file an involuntary petition generally do so because they haven’t been kept in the loop or believe you are taking assets out of the business. But if you’re candid and don’t leave out any creditors, few will bother to file.
The Option That Makes the Most Sense
To sum up: Bankruptcy isn’t your only choice, and it has its drawbacks. That said, bankruptcy can still add real value, for instance when your assets secure far more debt than they are worth and secured lenders will not negotiate outside of court. At Delancey Street, we understand how hard it is to juggle so many payments at once, so we want to help you find the option that makes the most sense for you. We are a business debt settlement company, not a law firm, and we negotiate with merchant cash advance funders and lenders for less than the full balance of the loan or cash advance. We do not sell you another loan. Your first consultation is free and confidential. If the better path is a bankruptcy, such as Subchapter V, we say so on the first call and refer you to an independent bankruptcy attorney.
