Somehow you made it through the first year, the second and then some. There were plenty of sleepless nights and days when your biggest clients didn’t pay on time and your business bank account dipped below what you thought was rock bottom. Then things did get worse. In the weeks leading up to a first meeting with a bankruptcy lawyer, you will have likely come face to face with the unpleasant fact that your company cannot survive on its own.
At Delancey Street we are a business debt settlement company, not a law firm. We negotiate with merchant cash advance funders and lenders for less than the full balance, but not every merchant cash advance situation can or should be resolved by debt settlement. When bankruptcy is the better path, we say so and refer the owner to an independent attorney. If you are headed into that attorney’s office in Memphis, here is our advice. Take notes during the meeting and ask plenty of questions. These are the eight we would start with.
The first is which chapter fits your business. Many owners may not be aware that there are different forms of bankruptcy, four of them in all. Chapter 7 bankruptcy is straight liquidation. Any entity - corporations included - may use it. Chapter 11 bankruptcy is a reorganization, available to corporations, partnerships, and individuals doing business. Chapter 13 bankruptcy offers a pay-out plan, available to small business owners and people with income. Chapter 12 bankruptcy is for family farmers. Where it gets complicated is in determining what type of bankruptcy will best suit your business, which is exactly why you ask.
Substantial Cost
Second, ask what it will cost. How much do you charge? Expect a substantial cost. Be sure you fully understand what you’ll be charged for and what kind of payment plans the firm offers. One Memphis firm publishes its fee list, and they will charge a corporation or partnership $1,450 for filing a Chapter 7 Bankruptcy, plus $335 for the court filing fee. With expenses (credit reports, copies, postage) that part totals $450. Its Chapter 11 filing fee is $1,717, plus a retainer of $9,500 for a small business. A medium-sized business would run $15,000. Complex cases, typically $25,000 to $100,000. Your retainer would be applied to an hourly rate of $250. Once the retainer runs out, the client is billed monthly.
Third, ask what the fee leaves out. A flat fee sounds tidy, but it doesn’t mean they will cover everything. Take the firm above. The Chapter 7 flat fee covers consultations and work but not litigation and motions. Your creditors might challenge your right to clear debt in bankruptcy court. If you have to go to court, you’ll want your lawyer to represent you, so make sure that’s part of the cost agreement. Defending any motion, complaint, or petition is $250 down plus $250 per hour. Typing and filing the petition in five days or less costs an extra $500. Discuss with your attorney what is covered for their fee.
The Stuff Your Business Owns
Fourth, a practical one. Ask what happens to the stuff your business owns. In a Chapter 7, a trustee takes everything and has the right to sell whatever is not exempt, in order to pay your creditors. If you are an independent contractor or sole proprietor, money you earned on a contract before you filed is an asset the Chapter 7 trustee can take. It also helps to know which of your debts are which. With some debts, the creditor has security for the debt by having a right to take back the item if you don’t pay. This kind of debt is called “secured debt.” With other kinds of debts, the creditor has no right to take back an item if you don’t pay. This kind of debt is called “unsecured debt.” Credit card debt is “unsecured” debt (it is not secured by any property or asset), and so is money owed to suppliers that have no security interest in the goods.
Fifth, if reorganizing is on the table, ask how Chapter 11 actually works. The debtor has 120 days after filing to propose a plan, which creates a breathing period where almost nothing can be done against the debtor except discovery. Creditors vote on the plan, and it can sometimes be “crammed down” over objections. However, the plan can also be denied, leading to new plans being proposed. This process involves a lot of paperwork, is extremely expensive, and requires numerous court appearances.
Sixth, ask when the protection starts. The “automatic stay” in the bankruptcy code provides a wall of protection between you and the lawsuits that, were it not for the stay, creditors would be pursuing to get you to pay your debt. The stay is available for all debtors, whether individuals or businesses. Ask about the exceptions, too: if you have filed Chapter 13 more than once in the last year, the stay will not last as long.
Seventh, ask which debts will survive. Taxes are where a lot of business owners get blindsided. While taxes are generally not discharged in Chapter 7 bankruptcy, in limited circumstances federal income taxes can be discharged: (1) The taxes are more than 3 calendar years old, (2) all tax returns were filed on time, and (3) the taxes were not assessed by the IRS within nine months before filing. However, IRS liens can block the discharge. A creditor can also file an objection to discharge of its own debt, for example a loan obtained with a false financial statement or by fraud.
Before the Petition Is Filed
Eighth, ask what you should and should not do before the petition is filed, because doing the wrong thing can cause your bankruptcy to be denied. Don’t conceal property. Don’t destroy or falsify records. And don’t defraud. Not only could you lose your discharge, but you could also face criminal charges. In Tennessee, it’s even a crime to sell secured goods. Your lawyer may also tell you to move your operating account to a bank with which you don’t have any credit cards or loans. If you don’t, your existing lender may try to take the money in your accounts. You also have to list every one of your assets and every single debt in your bankruptcy petition. Finally, you must take a credit counseling course before filing for bankruptcy.
A bankruptcy usually stays on your credit record for eight years, and can stay as long as ten. Go over other alternatives in detail. There’s no point in putting the assets of a successful or salvageable company in harm’s way if bankruptcy is just a short-term fix. Our first consultation is free and confidential, and if a cheaper option exists, or bankruptcy is the right call, we will tell you on that first call.
