When a company can no longer keep up with what it owes, the owner usually starts by looking for a lawyer. And if your small business is structured as a limited liability company (LLC), a partnership, or a corporation, a bankruptcy attorney is required to file for Chapter 11 on behalf of the company. So the real question is which attorney. The more experience your attorney has, the more questions they should ask about your situation and the more time they should spend on learning your story. Every business entity and business debtor in Chapter 11 is different, and the attorney should have a strong background to be able to draw on when making the difficult decisions on how your case will proceed.
It helps to understand why experience counts for so much here. If your business files under Chapter 11, you’re in the most expensive and complicated kind of bankruptcy. You get to stay in business and in control, but you have to propose a repayment plan, and you’ll have about four months to get one to court (and if you’re lucky, the court will give you as long as 18 months). Your creditors will vote on the plan, and you’ll need a two-thirds vote of the debt and a majority of the claims. If you can’t get it, the judge might still be able to stick it on them anyway in a “cramdown”. In short, a lot has to be done within a very short period of time. At the end of the day, it all comes down to the plan. This is where the input of an experienced lawyer is absolutely crucial. An experienced Chapter 11 attorney should be more familiar with the nuances of the bankruptcy code and the ability to apply them to the case at hand. They will know how to move the case through the process efficiently and identify the types of deals that are likely to succeed. Experience is necessary to successfully negotiate with a business’ lenders, suppliers and customers.
Ask the Attorney
My first recommendation to anyone interviewing a bankruptcy attorney for their business is to ask how many Chapter 11 business bankruptcies the attorney has handled as the business owner’s counsel. It is quite possible that an attorney with plenty of experience handling personal bankruptcies would not be appropriate for the owner of a small business. Next, the business owner should ask the attorney to explain how a plan is drafted, how the voting by creditors works, and what a cramdown involves. If the attorney can’t respond in a way the client can understand, then that attorney likely isn’t the right fit.
Your lawyer will also be dealing with people other than you and your creditors. A Chapter 11 case isn’t just the company. It has several other participants, too. First, the U.S. Trustee - a Justice Department employee - oversees the case, appoints a creditors’ committee, and collects the company’s financial and operating reports. The company also has to pay the U.S. Trustee a quarterly fee of between $250 and $10,000, depending on how much the company is paying out to its creditors. Then, there’s the creditors’ committee, which is generally made up of the seven largest unsecured creditors. It gets to hire its own attorneys, with the cost paid by the business’ estate.
All of that adds up, so ask for an estimate of the total cost, not just the lawyer’s fees. Include the court filing fee, the U.S. Trustee fees you’ll pay each quarter and the lawyers of the creditors’ committee, who get paid out of your company. Chapter 11 is only worth the cost if you can afford it and the value of the result outweighs the price. An honest lawyer will tell you when it isn’t worth it. A careful lawyer will also check early whether your company has had another bankruptcy case dismissed within the previous 180 days, because if it has, it cannot file under Chapter 11 yet.
Subchapter V
Then there is Subchapter V, a track within Chapter 11 for smaller businesses under a certain debt cap, enacted as part of the Small Business Reorganization Act of 2019. To take advantage, a small business debtor simply checks a box on its petition. Subchapter V costs less: it’s not subject to the fees and expenses of a U.S. Trustee and a creditors’ committee; the costs of administration can be paid over the life of the plan. Subchapter V costs less time: the plan must be filed within 90 days; the plan can be confirmed even if no class of creditors voted for it; only the debtor can file or modify the plan.
There are some potential downsides to Subchapter V, too. You always get a trustee (usually he or she won’t run the business but will help with the plan and pay creditors out under it). The clock runs very fast, and getting extensions is difficult. Your business needs to commit your projected three-year disposable income to the creditors, which can be tricky to figure out if the numbers swing widely. The plan needs to spell out what happens to your business if you default, and may require you to sell off assets, for example.
So ask every lawyer you interview whether your company qualifies for Subchapter V and whether it is a good idea for you. Qualifying depends on whether you are engaged in business (as opposed to merely holding real estate), and on whether the size of your debts is below a certain dollar limit. That limit has changed over the years, so ask for the current number. Any good lawyer should not push one solution or another but help the business owner weigh the pros and cons of each.
Automatic Stay
A good attorney should also be able to tell you what filing will actually do for the business day to day. Once the petition is filed, an automatic stay goes into effect. Collection calls stop. Foreclosure. Even lawsuits. The company doesn’t have to make payments on old debts while the case is pending, and may find it easier to borrow new money — debtor-in-possession financing — to keep operating. Contracts such as commercial leases that no longer make sense can be rejected. When the plan is confirmed, the business’s old dischargeable debts are gone.
Ask how long all of this will take, too. Plan ahead if possible. Gather your financial records, and talk to professionals, before you even file the petition. The first stage - formulating the plan - can take six to twelve months, the second stage, paying it, three to five years or more. If the court refuses to confirm any plan, it will dismiss the case or convert it to Chapter 7, which means liquidation. If you fail to carry out the plan later on, the creditors can go back to suing and foreclosing.
You’ll be spending anywhere from six months to a year of this attorney’s time crafting the plan, and you may spend years paying it off. And all of those hours are valuable to your company’s future. So choose carefully. Look for someone who returns your phone calls promptly, and explains things clearly. Someone who doesn’t try to oversell you on a reorganization when it isn’t possible. Someone who puts your interests ahead of their own. Someone you can trust. Take the time to interview several. Good bankruptcy lawyers also tell you, if they think it’s likely, that you may have to give up everything and let it all end in Chapter 7 liquidation. That honesty, more than any promise, is the surest sign you have found the right attorney for your company.
