When the payments on a company’s debts start eating every dollar that comes in, Orlando business owners eventually hear the same advice: go talk to a bankruptcy lawyer. That’s what happens when your bills are taking your monthly revenue, your merchandise or services aren’t bringing in enough money, and you owe a lot of debt. At Delancey Street we are a business debt settlement company, not a law firm. We negotiate with merchant cash advance funders and lenders for owners, many of whom are also weighing bankruptcy. The bankruptcy process is complex. But not all bankruptcy petitions are created equal. Before you sit down with an attorney, it’s important for business owners to understand the options, so here are eight questions worth bringing to that first meeting.
Form of Bankruptcy
Start with the blunt one: should the business file Chapter 7, and what would we lose? With a Chapter 7, the debtor’s nonexempt property gets sold and the proceeds are distributed to creditors. Most unsecured debt (debt with no collateral) and the debtor’s personal liability on secured debt can be wiped out, though the lien will stay with the property itself. There is no repayment plan, and a trustee will be appointed to oversee the case and make payments. Some of the debtor’s property may be subject to liens and mortgages, so it is important to carefully consider exemptions and liens before filing for Chapter 7.
Second, if the business is worth saving, can Chapter 11 keep the doors open, and will I still be in charge? Filing under Chapter 11 lets a company reorganize, which can help them keep operating while working through their problems and emerge solvent. The business owner can keep running the business as they normally would during the reorganization, though in rarer cases a Chapter 11 trustee may be appointed if there is mismanagement. There is no debt limit. Chapter 11 is the most complicated and flexible form of bankruptcy and also the most expensive to the debtor.
Third, would a liquidating Chapter 11 work better for us than a Chapter 7? You might think of Chapter 11 as just a “reorganization” of a business. But it can also be a “liquidation.” Consider a medical practice that has to put time between filing and selling. If the practice files for Chapter 7, a trustee might come in and shut off the lights at the practice. That wouldn’t be great for patient care. A liquidating Chapter 11 would allow the practice to keep treating its patients while it tries to plan for an orderly sale.
Fourth, do we qualify for Subchapter V? Subchapter V is the “fast pass” filing in a bankruptcy case that was originally designed for small business debtors with commercial debts of less than $2,725,625. And as of March 27, 2020, as set forth in the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) that debt limit increased to $7.5 million. Ask what the limit is today and where your debts fall. A Subchapter V case is typically faster and cheaper than a standard Chapter 11, and it was designed to be easier for small businesses. A debtor can pay off its debt over 3-5 years using its disposable income. In its first year, Subchapter V cases made up about twenty percent of all Chapter 11 filings, and the Middle District of Florida, which includes Orlando, led the nation in Subchapter V claims filed.
Fifth, how is Subchapter V different from a regular Chapter 11? The biggest difference between Subchapter V and standard Chapter 11 is that Subchapter V “waives the absolute priority rule,” the rule that decides the order in which plan payments are made. It also creates a Subchapter V Trustee to act as an intermediary between the debtor and the creditors, and the debtor does not pay a quarterly United States Trustee fee. In Subchapter V, only the debtor can file a plan, and they have only 90 days to do it (as opposed to 300 days in a standard Chapter 11). In a standard Chapter 11, creditors can step in after exclusivity expires and file competing plans. Admin costs can be paid over the life of the plan, if it is confirmed under section 1191(b), instead of in full on the effective date.
Sixth, what about my own debts, and does Chapter 13 apply to me? Chapter 13, often called a wage earner’s plan, is for individuals. It’s for folks with a reliable income. It’s intended to let folks set up an installment payment plan to pay all or part of their debts over 3 to 5 years. During that time, the creditor can’t collect. So it’s a debt payment plan. Debtors can retain their collateral if payments are ongoing, including their home and their car, even if they’re behind or in foreclosure. But all the debtor’s disposable income must go to the debt. The debtor must take a credit counseling course from an approved agency. A Chapter 13 case can be converted to a Chapter 7 later, if appropriate. Certain obligations can’t be discharged, like student loans, alimony and child support.
After Filing
Seventh, what happens after we file? A creditor will typically get a bankruptcy notice a week or so after filing. It should include a case number and a list of important deadlines. Then there’s a meeting of creditors, when everyone can ask questions. A representative of the debtor is required to attend, but sometimes no creditor shows. To get paid, the creditors must submit a proof of claim showing the amount they are owed. From there, payment will be determined by the trustee or the reorganization plan. The trustee is a representative for the debtor’s estate, appointed by an officer of the Justice Department.
Other Strategies That Might Work Better
Finally, is bankruptcy really our best option? This is the question a good bankruptcy lawyer will ask before advising on any bankruptcy filing, since every business is different. There are strategic considerations when weighing each type of filing. Bankruptcy can be a great tool, but is it best for you? Are there other strategies that might work better for you? For a business buried in merchant cash advances, one may be negotiating with the funders for less than the full balance, which is what we do. When bankruptcy, such as Subchapter V, is the better path, we say so on the first call and refer the owner to an independent bankruptcy attorney.
It is painful to talk about those bad numbers. The answers to each of the questions above can provide clarity. Get the facts, understand your options, and make a good decision.
