So your business just got sued and in a panic you have rushed to the bankruptcy lawyer’s office. Wait a second. You do not necessarily have to file bankruptcy if your business has been sued. There are situations in which it is appropriate to file, but there are also situations in which you should not. Just remember, bankruptcy is not the only game in town for the business debtor. Don’t confuse “want to” with “have to.” The questions below can help you tell the two apart before you commit.
The first question is whether you have to file. A “have to file” is a situation where something ugly is about to happen to you - something that you can’t make go away. It’s coming. It’s inevitable. There’s an eviction, a foreclosure, a bank account that’s been levied and has already lost money. Control has been lost, or is about to be, and the bankruptcy process may be how you get it back. Those are the easy calls. But most cases are want-to-files, and a want-to-file situation is where you are not necessarily in imminent danger.
The second question is what is creating the pressure. Usually the answer is: It’s a lawsuit. The sheriff comes and shoves a pile of papers in your face and you panic and now the next day you are sitting in a bankruptcy lawyer’s office. That’s all. You got sued. That’s not as dramatic as it may seem. Lawsuits take a long time to resolve. In Los Angeles, in general it takes about a year, from the first day the sheriff drops off papers to the last day you’re in court. So you have time.
That leads to the third question: what would it cost to let the lawsuit run its course? Even if you get a bad judgment, would it be better to let the lawsuit string itself out? Maybe you’ll end up settling it anyway, and then the problem is resolved. Bankruptcy might be overkill.
Whether You Can Afford Bankruptcy
The fourth question is whether you can afford bankruptcy at all. For bankruptcy, you have to be in a position to afford it, and to be able to pay the high Chapter 11 fees. You would not drive to Las Vegas from Los Angeles, on half a tank of gas, would you? So don’t decide to file for bankruptcy and then find out when you are in the middle of the desert that you don’t have enough gas to get there. You should not enter bankruptcy only to discover you cannot afford to reorganize. Chapter 11 is a very expensive process: $50,000 is the bare minimum to reorganize. Literally, the sky is the limit. Chapter 11 is an extreme measure. You should think very carefully about using it.
The fifth question is who else will have a say in your affairs. When you file, a new cohort of people will start riding shotgun in your Mustang, choosing your playlist and turning your AC down: The U.S. Department of Justice’s Trustee Program and its trustee offices, the court, and your creditors who have a big say in what happens. Are you ready to deal with them? The bankruptcy can cause losses of control that may not be otherwise suffered if a debtor does not file. The question of loss of control must be weighed.
It Is All About Profit
The sixth question is whether your business can make money while it is in bankruptcy. Losing money for a few months is fine, as long as you can point to the low end of a seasonal business or to backlog orders which will eventually make money. But losing money for ever is not an option.
The seventh question is how new credit will be treated once you file. This is where losses become even more problematic. Let’s say I extend unsecured credit to your business the day before you file. It is general unsecured debt, which is generally repaid over time (if ever). Let’s say I extend unsecured credit to your business the day after you file. Now it is entitled to administrative expense priority, on a par with unpaid legal fees, and is entitled to be repaid in full, right away, for you to emerge from bankruptcy. If too much post-bankruptcy debt accumulates unpaid, the boat sinks. It goes down. The business is top heavy and can’t pay its debts to get out of bankruptcy.
It is all about profit. You and your lawyer are a team. And while the lawyer can do a lot for you, the lawyer can’t do anything without a profitable business. The bankruptcy attorney takes that profit, drops it to the bottom line and carves it up for creditors. If there is no profit, there is nothing to carve, so there is no deal.
The eighth question is whether the lawyer would advise you not to file. Sometimes the hardest advice a bankruptcy lawyer gives is to tell an owner who wants to file not to. Your first thought may be that the lawyer doesn’t know what they’re talking about. But it might also be that the lawyer has crunched the same numbers and done the same analyses and has seen something you haven’t, and that there is a better way. If you are eager to file, you will always find a bankruptcy lawyer to file for you. But if an experienced bankruptcy lawyer who has worked on the system and understands the downside advises you not to, perhaps you should listen.
You got sued. It can be a scary time in your business. But don’t default to filing bankruptcy just because you think you have to.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
