A contractor covers much of a project’s cost up front and waits to be paid. And if they took out a loan for the project, they’ve got to pay the interest on that loan too. All this before the client pays the invoice. And construction payments are notoriously slow. Cash flow is never a constant; it comes in waves. Most companies will have at least one challenging quarter, but for contractors, this is an ongoing reality. That is why a contractor that is profitable on paper can still be forced into bankruptcy: from the accounting perspective, profit does not mean your bank account is full of money.
When the debt gets ahead of you, a turnaround consultant can look like a lifeline. For obvious reasons, it is difficult to diagnose a financial problem within one’s own company. A turnaround consultant can look at the whole situation objectively, even fairly coldly, and assess the true extent of the damage. A consultant can save a company only if he or she tells you a timely, difficult truth you don’t want to hear. So the real question is whether the advice you get starts in the right place, and whether the business is still worth saving.
There is no single reason contractors go under, and sometimes it is through no fault of their own. It is almost always cash flow. Regardless of the specific reason for the cash flow problem, here’s how it usually plays out: You get paid late (or only part of what’s due) on one job, so you have no cash for the next one. The past payments pile up, and finally, the scale starts tipping in the wrong direction. A weak credit and collections policy makes late and partial payments worse, and over-reliance on debt, a poor debt-to-asset ratio, financial fraud or a simple drop in sales can do the same damage. Retainage, the money a client holds back until the project is completed to specifications, is another trap: many contractors don’t count it when budgeting cash flow, which leads to a big hole in the accounts. It belongs in every cash flow projection, so the company can keep operating until the retained funds are collected.
Before a contractor files anything, it would be smart to take a close look at his or her accounts receivable (the money customers owe you) and accounts payable (the money you owe subs, suppliers, vendors, etc.). For receivables (accounts customers owe you), take action to collect what is owed. If you still have lien rights, file a mechanics lien, which is the most effective collection tool in most situations. If your deadline has passed, consult a construction attorney, take them to small claims court, or send the account to a collection agency. Some owners give up too soon on receiving payment for their work and choose not to pursue the option of obtaining legal counsel in order to collect monies owed and enforce mechanics liens. If you must resort to a lawsuit to get paid, do so, but if you are going to go this route, go aggressively.
Okay, you’ve collected all the accounts receivable you could. As for your payables, regardless of how old they are, there is always the opportunity to negotiate them. Pick up the phone and call the rep on every past-due account. Most will negotiate - even if it is only to buy some time while you resolve the cash flow problems. Once you are in bankruptcy it becomes much more difficult for creditors to collect, so it is in their best interest to keep you going. Once they hear your proposal, most will say: “All we care about is getting paid.” And who would argue with that?
Bankruptcy Enters the Conversation
If those two steps are not enough, bankruptcy enters the conversation, and there are three main chapters. Chapter 7 is liquidation. The contractor’s property can be seized and sold to pay off debts. (A few belongings, including some clothing and household items, are protected.) For a business that hopes to stay open, a Chapter 7 is the end of the line. Chapter 11 is reorganization. Debts, assets and business operations are restructured, and the company has a way to pay off creditors gradually and continue its business. On paper, Chapter 11 reorganization is a really good idea if the contractor wants to keep its doors open and just change the debt situation. The company must get court approval for some business decisions. It is a complicated and expensive process. Chapter 13 is a wage earner’s plan. This applies to an individual, typically a sole proprietor or someone running an unincorporated business. Under Chapter 13 the contractor can keep their property, and repay their debt over 3 to 5 years. Homeowners can keep their homes, and stop foreclosures. There are limits to the amount of debt, and the limits are adjusted with the consumer price index. One recent set capped unsecured debts at $394,725 and secured debts at $1,184,200, so check the current figures.
An attorney from New York, D.C., Maryland, and Virginia reported that in her experience most construction Chapter 11 cases end up as Chapter 7 liquidations. Why? It turns out that construction companies are usually not good reorganization candidates. There’s usually no good will, no active projects on the books or other assets to sell off. And equipment usually does not generate enough income to address the issues. Then there are owners and upper-tier contractors that make excuses for not paying for the work. And often there’s also back wage or tax liability that may not be dischargeable. In liquidation Chapter 11s, there are times when it works (for example, when the bank or surety is supporting the company while it fights with owners that won’t pay), but that’s not the typical case. The company has to have a viable business going forward. Many construction firms do not meet that standard. Her advice is to evaluate whether it’s the business or the owner that should file.
Filing for bankruptcy is expensive and it won’t always give you the protection you want, particularly if the contractor doesn’t have a plan for staying in business. On top of lawyers and accountants, the court charges filing fees, which have run $1,167 plus a $550 administrative fee for Chapter 11, $235 plus $75 for Chapter 13, and $245 plus $75 for Chapter 7. Think about what your long term plan is to keep your company in business, and what you expect bankruptcy to accomplish for your business. The point is that bankruptcy is an emergency relief as opposed to an emergency funding option.
Not every lawyer is so wary. A Texas attorney calls bankruptcy a tool that every business and individual has access to, one that gives a break from collection efforts, lets you settle with some creditors for small amounts and brings the beginnings of peace of mind. With bankruptcy, you do get to push the pause button. But bankruptcy is not always the answer. You can start another business afterward. But be prepared: Your credit rating will be damaged (i.e., it’s harder to get loans), and if you start a new business that’s too similar to the old one, creditors may go after it.
A Trained and Knowledgeable Advisor
At the first sign of financial distress, it’s time to talk to a lawyer, preferably one who has a deep knowledge of bankruptcy law as well as construction law. Certain actions taken before filing may cause your company to “not qualify” for bankruptcy. Not all bankruptcy attorneys have the same level of experience in construction law. Some businesses focus their resources on hiring a lawyer, but a competent tax accountant may also provide valuable services. A qualified tax accountant can tell you whether you are eligible for any tax discharges and when to file for them. An accountant can provide a fair and accurate asset valuation, and can manage a company’s affairs during proceedings to ensure assets are not misappropriated or embezzled.
So can a turnaround consultant save a contractor buried in debt in 2026? A good one can find the cause of your problem and suggest possible remedies. But, remember, every solution to a problem has its cost. What no adviser can do is make a client pay you or turn a company with no future cash into a viable one. The remedies that work are unglamorous: collect what you are owed, negotiate what you owe, and treat bankruptcy as one option among several, chosen with a clear plan and people who know construction. Right now you should be revising your business plan so that it is predicated on survival instead of on a maximization of profits. When things do turn south, there’s a decent chance you won’t be able to make it through without a trained and knowledgeable advisor. But there’s still time.
