A lot of the owners we talk to at Delancey Street think Chapter 11 is simple: “I file, I pay a little fee, I get an automatic stay, and that’s it.” It’s not. Chapter 11 is for almost any business who is financially responsible enough to afford the expenses. The sole financial test is whether or not the cost of Chapter 11 is justified by the benefit. The automatic stay effectively stops all collection, and, by extension, lawsuits, collection calls and letters. Usually you buy several months’ breathing room. But the filing fee is only the start.
Costs Accumulate
The first cost is a fee owed to the government every quarter. Plenty of owners know the filing fee, but most people never hear about the $250 to $10,000 quarterly fee each debtor pays to the U.S. Trustee — until they start paying it. You pay the U.S. Trustee a fee every quarter, until you’ve confirmed your plan. The amount depends on how much you pay out, in the quarter. That’s on top of the $1,039 fee you pay to the clerk when you file your bankruptcy case.
The second cost is your lawyer. Ask a bankruptcy attorney what Chapter 11 will cost and the answer, for the most part, will be “it depends.” Just like an auto mechanic who will not give you a price estimate unless he has seen your broken down car, without some facts about your business, it is impossible to give you a cost. Unless your business is very simple, the lawyer will bill you by the hour, and will want a retainer paid in advance. A simple case might start at $15,000, and a complex one can run many times that. How much will vary depending on the size of the business, what kind of relief is needed, the attitude of creditors, and whether the owners agree on a way to reorganize. In any event, the court must ultimately approve attorney fees as reasonable.
The third cost is time. Unfortunately, the reality of Chapter 11 is that it takes months. How many? The answer is best given in two parts; first, the period before the plan is confirmed; and second, the period after confirmation. Generally, this will be anywhere from 6 to 12 months before the plan is confirmed, depending upon the debtor’s circumstances, the plan, and the reaction of the creditors. After confirmation, it is the time for “carrying out the plan”, and 3 to 5 years is a common time frame for a small business. The upside is that in many cases the business won’t need cash to pay its past due creditors for a while. However, the debtor may still be required to make payments on secured debts and debts to suppliers of goods or services used to keep the business operating. And the quarterly fee keeps running through the whole first phase. Costs accumulate.
The fourth cost is privacy. Once you file, you must reveal every creditor and owner, describe every piece of property, disclose your financial condition, and put it all in court documents. You must make periodic reports on your finances and operations to the U.S. Trustee, at least until a plan is confirmed. Before you can go to creditors with a plan, you must prepare a disclosure statement, file it with the court, and get it approved by the court. Only then can you send the plan to the creditors to vote on it. The (apparent) goal of this whole set of requirements is to create transparency.
The fifth cost is control. Owners like to think they are still in control. Not quite. In fact, while the business is in Chapter 11 the company continues to operate with the owner in charge, but is subject to the rules and orders of the court. This creates some limitations. Cash, bank accounts, and checks are called cash collateral and a secured creditor must consent, or the Court must approve every use of the funds. New secured credit, and credit that is outside the ordinary course of business, must have Court approval. And if the debtor in possession fails its responsibilities, the court can appoint a trustee to take over management and control of the property. (Most small business Chapter 11 cases don’t end that way.) It can also convert the case to Chapter 7 or dismiss it. Chapter 11 doesn’t “fix” the business for you, it just sets up a restructuring process.
The sixth cost is the chance that none of it works. Chapter 11 can be a risky proposition. The debtor basically needs to win the creditors’ vote. Creditors vote by class, and a class accepts only if creditors holding two-thirds of the dollar amount and half the number of claims that vote say yes. A rejected plan can usually be modified and brought back. If the debtor can’t get a plan confirmed, then the case is converted to Chapter 7 or dismissed. Even after confirmation, a debtor that cannot carry out its plan, and cannot amend it, faces the same outcome, and creditors may sue or foreclose. You’ll pay all these bills no matter what the outcome of your case.
Add It All Up
So before you sign a retainer agreement, add it all up. The question is not whether Chapter 11 is open to your business. It probably is. The question is whether the benefits of Chapter 11 justify these costs. The benefits are a reprieve and a chance. The automatic stay buys breathing room. This can be just enough time to reorganize the business. But ask yourself whether you have the time and resources, and whether the process will achieve the result you are looking for. One warning sign is worth knowing: debtors who cannot pay the filing fee when they file seldom succeed under Chapter 11.
How Many Options They Have Available
In our experience, many owners don’t know how many options they have available to them. At Delancey Street, our senior advisors negotiate with merchant cash advance funders, lenders and other business creditors for less than the full balance owed. We do not market loans. Your case fee is a percentage of your total enrolled debt, quoted in writing before we start. We are not a law firm, and when bankruptcy is the better path, we refer owners to a vetted independent attorney, such as Subchapter V counsel. The first consultation is free and confidential. If there is a cheaper solution or we know we can’t win, we tell you so on the first call. If we cannot win a case, it’s quicker to realize that at the beginning. Our advice to clients of Delancey Street is don’t go there unless you have a good idea of where you are going.
