You run a business, the debt has piled up, and you have started talking to bankruptcy lawyers in Naples. Walking into a first meeting with an attorney can be overwhelming. You will get more out of the meeting if you walk in with the right questions. So, don’t be embarrassed or discouraged by your questions. At Delancey Street we are a business debt settlement company, not a law firm, and when bankruptcy is the better path we send owners to bankruptcy counsel. Here are the eight questions we would ask.
Explore Other Options First
The first question is the most basic one: “Is Chapter 11 the right choice for me? Or should I explore other options first?” Chapter 11 is considered the most complicated bankruptcy case that a person can file. In addition, it is usually the most expensive kind of bankruptcy proceeding. So it’s important to explore and analyze all your other options before you consider filing.
One of the other options to explore before filing is debt settlement. We negotiate with merchant cash advance funders and lenders for less than the full balance owed. We do not sell you another loan. The first consultation is free and confidential. If bankruptcy, such as Subchapter V, is the better path for you, we say so on the first call and point you to bankruptcy counsel.
Chapter 7 Versus Chapter 11
Next, ask the lawyer to walk you through Chapter 7 versus Chapter 11. While there are six main chapters in the bankruptcy code, the most common are 7, 11 and 13. Chapters 9 and 12 are for municipalities and family farmers, and 13 is a repayment plan, and 15 is for international bankruptcies. Chapter 7 bankruptcy is liquidation, and can wipe out several types of unsecured debts, so it can be the last resort to clean up business finances before shutting the doors for good. Chapter 11 bankruptcy is reorganization of assets, debts and business affairs. The business doesn’t have to liquidate its assets and remains in control of its operations. The business typically remains open for business. LLCs, partnerships and corporations typically file for Chapter 11. Basically, instead of selling all your assets, paying off what you can, and going out of business (Chapter 7 bankruptcy), you are getting help figuring out how to work out your debts and stay in business.
Third, find out whether your business qualifies for Subchapter V. The Small Business Reorganization Act of 2019 became effective on February 19, 2020. Subchapter V was added to Chapter 11 to make bankruptcy less complicated for small businesses. According to the Department of Justice, the term “small business” includes entities with less than about 2.7 million dollars in debt if they satisfy other criteria. Subchapter V has shorter deadlines, more flexibility to negotiate with creditors on a plan of reorganization, and a private trustee works with the debtor and creditors to reach a consensual plan.
The CARES Act, which was signed into law on March 27, 2020, temporarily increased the debt limit for a subchapter V bankruptcy to 7.5 million dollars. The increase applies to Chapter 11 cases filed after the date of enactment and is set to sunset one year later. The law has changed, so get clear from your lawyer exactly which limit applies to your business, and whether you also satisfy the other requirements.
The fourth question: Who will be running my business while we’re going through the case? In most situations the answer is you. You’re referred to as the debtor in possession, but in cases of gross incompetence, dishonesty or fraud, the case is turned over to a bankruptcy trustee who will run the business during the case. Your lawyer should be able to tell you if it’s likely that you will have to step aside.
Fifth, what decisions will need the court’s permission? In bankruptcy, the company cannot make many decisions without the bankruptcy court’s approval. The company won’t be able to sell assets, expand or wind down operations, start or terminate rental contracts, sign contracts with unions and suppliers, pay its attorneys, and take other actions without getting the court’s permission first. In addition, the debtor is not allowed to enter into a business loan that won’t start until after the case is over. Ask your lawyer how this will impact your day-to-day operations.
Sixth, ask: What will my reorganization plan look like? As the business filing the bankruptcy, you get the first crack at creating and proposing a plan. The plan may involve renegotiating business debts, downsizing operations to reduce expenses, or liquidating business assets to pay creditors. As long as your plan is considered fair and feasible, the court will most likely accept it, and the process will move forward. Chapter 11 gives the debtor a “fresh start.” But the terms of that fresh start will depend on the debtor meeting its responsibilities under the reorganization plan. So ask the lawyer what you will be on the hook for after the plan is approved, and what will happen if the business falls short.
Seventh, ask: How will the case protect my business from creditors? The court will issue an order that prohibits creditors from pursuing the business during the reorganization process. You remain in control of the business during the process while you develop a plan, and so you can keep the business operating and generating cash flow to help with repayment. Most creditors are willing to listen to Chapter 11 cases because they can recover most if not all of their money.
Question eight: “What will this cost me, and can I afford the plan?” Chapter 11 reorganizations can be very costly. There are the court proceedings, for one thing. And if you’re in financial enough straits that you need a reorganization, the legal costs alone might be prohibitive. The plan has to be accepted by the court, and be realistic enough that you can reasonably repay all your debt within the allocated time period. Get the honest numbers on this.
In the end, a good bankruptcy lawyer will welcome these questions and be able to answer them for you. If a lawyer brushes them off, keep searching. Chapter 11 can be a lifesaver for your business, but it’s complicated and expensive, so you need to make your choice with your eyes open. Regardless of what you decide, make it before the creditors force you to act.
