We are Delancey Street, a business debt settlement firm, not a law firm. We negotiate with merchant cash advance funders and lenders for owners. Owners in Montgomery start calling us when those payments swallow their cash flow. Sometimes, the better path is bankruptcy. In that case, we refer the owner to an independent bankruptcy attorney. The owner should go into that first meeting with questions ready. These are the eight we would bring.
Business Bankruptcy
Here’s the first question: which chapter of the Code is best for me? Ask your lawyer for a clear answer, and ask why. Chapter 11 is also known as the reorganization bankruptcy. Any kind of business can use it, and so can individuals who meet certain requirements. Most companies that file Chapter 11 want to reorganize and stay in business, not sell off their assets and close up shop. There are four kinds of business bankruptcy, and each serves a different purpose. Chapter 11 is the most familiar one; the business keeps running and tries to reorganize. Chapter 7 is a full-scale liquidation and the business is dissolved. Chapter 13 is similar to Chapter 11 but can only be used by certain sole proprietors. Chapter 12 is for small farming and fishing operations. It allows family businesses to restructure their debts instead of liquidating.
The second question: Do I qualify for Subchapter V? That is a streamlined version of Chapter 11 bankruptcy that is available for certain small businesses. The regular Chapter 11 can be overly expensive and cumbersome for small business owners. To qualify, you must engage in a commercial activity, have debts below the limit of secured and unsecured combined, and at least half of your non-contingent debts must come from business activities. And you must declare that you want Subchapter V when you file. The small business debtor definition doesn’t care how big your business is, it cares how much debt you have. Even individuals can qualify, but only if you’re in business and not in debt over a certain amount. Owners who make their living owning a single piece of real estate are usually excluded, though there are exceptions, such as when multiple parcels are not considered a single property or project. Check with a lawyer to see where you fit.
Third question: which debt limit applies to my filing? The Small Business Reorganization Act of 2019, enacted in August of 2019 and effective in February of 2020, originally set the limit at $2.75 million. In response to the pandemic, the limit was increased to $7.5 million for cases filed between March 27 2022 and June 21 2024. After that it reverts to $2.75 million unless Congress decides to change it. This amount has changed before, so ask which number applies the day you file.
During the Case
Fourth question: what happens to my debts during the case? One of the main reasons to use a Chapter 11 to reorganize business debt is because debtors get relief while they are reorganizing in Chapter 11. However, this relief depends on the type of debt. The good news: most Chapter 11 debtors get a moratorium on paying general unsecured debts for about six to twelve months. The less good news: there may still be debts that you have to pay during the moratorium, like secured debt for the goods, services or property needed to keep the business operating. Ask which debts do and don’t go on hold.
On to the fifth question. The question everyone asks is whether they can stay in charge of their own business. The short answer is, you will be: as a debtor in possession. A debtor in possession is the debtor who runs the business after filing a Chapter 11. Not only is the DIP running the business, the DIP is a fiduciary that basically has the powers and rights of a trustee. It can hire professionals like accountants, appraisers, and lawyers, but it has to get court approval. The kicker is that the DIP is a fiduciary, so you need to know what that means for how you handle the day-to-day.
The sixth question is a local one. Who is going to watch over my case here in Alabama? Once a case is filed, someone is appointed to monitor the case and all actions that are taken by the parties involved. In most states, the United States trustee is that someone. In Alabama and North Carolina, there is a bankruptcy administrator in place. Owners in Montgomery should be asking their lawyer how this will be monitored in the area. A case trustee may also be appointed, after talking to parties who have an interest in the case, and the court must agree.
Seventh: How will the plan of reorganization be constructed and who will vote on it? The plan of reorganization is a comprehensive, complex document prepared by the business debtor. It sets out how the debtor will pay off its debts over time and how it will operate the business after it emerges from bankruptcy. It divides creditor claims into groups and explains how each group will be treated. The creditors are all given a copy of the plan and then they vote. After all the voting, the bankruptcy court provides the final approval. In Subchapter V reorganizations, at least half the creditors in each voting class must agree to the proposed plan of reorganization. If they don’t, it’s up to the bankruptcy court to step in. A creditors committee is made up of a group of creditors who are given broad rights and responsibilities. Among other things, the committee will come up with a reorganization plan and determine whether liquidation is the better choice. Ask your lawyer what you can expect from a vote on a plan, and what happens if one class says no.
Eighth, what happens after the plan is confirmed? A plan can still be modified after it has been confirmed if the modification meets certain requirements of the federal bankruptcy code, and the court must determine that a modification is warranted. A court order is issued to begin post-confirmation administration. The creditors committee or trustee may take some legal actions if the debtor objects to certain claims or funds need to be recovered. Make sure you know your obligations after confirmation.
The Better Path
Bankruptcy is not the only tool in the toolkit. At Delancey Street, we negotiate with funders and lenders for a sum less than the balance owed. We are not in the business of selling another loan. The first consultation is free and confidential. If a cheaper option exists or the settlement will not work, we say so on the first call. When bankruptcy, including Subchapter V, is the better path, we route you to an independent bankruptcy attorney. Either way, bring these eight questions with you.
