Most of the owners who call Delancey Street have already thought about bankruptcy. They’re usually looking for a way out of mounting debts, or a chance to reset. Maybe they’ve already talked with a lawyer or a CPA. Some want to hold onto their business. Others are just trying to understand what their real options are. We are a business debt settlement company, not a law firm, and when bankruptcy is the better path for someone, we say so. People don’t usually understand that there is a menu of options under bankruptcy law, and working out which one fits a struggling small business means weighing a lot of factors. Make the lawyer work for you by knowing exactly what you want to find out. Here are eight questions to bring to a business bankruptcy lawyer in Queens.
Chapter 7, Chapter 11, and Chapter 13
First, which chapters can my business actually use? A business’s legal status will determine what bankruptcy relief it is eligible to receive. Only sole proprietors can use the discharge provisions under all three chapters: Chapter 7, Chapter 11, and Chapter 13. Corporations, partnerships, and LLCs can’t file under Chapter 13, but can file a Chapter 7 case. The automatic stay will give them relief, but they aren’t eligible to receive a discharge under Chapter 7. All businesses, no matter what their legal structure, are eligible to file under Chapter 11 and can receive a Chapter 11 discharge.
Second, should we file Chapter 7 or try to reorganize under Chapter 11? For the majority of struggling small businesses the first question is often whether to file a Chapter 7 bankruptcy or try to restructure the business under Chapter 11. They represent two vastly different paths. But if you think the situation would be best resolved through reorganization, then the lawyer should be able to explain that to you. And they should be able to explain what you need to do to make that work.
Chapter 7 Can Be the Right Choice
Third, does the business have a real future? Chapter 7 can be the right choice for many situations. It may make sense, for example, when the business is dead. There might be no demand left for your product, like old-fashioned rotary phones or encyclopedias. Or your equipment might be so old or broken down that you can’t compete anymore, and you just don’t have the money to replace it. Answering that honestly requires a realistic analysis of your finances, without thinking “Maybe there is a change of heart from that stubborn customer who is refusing to pay his bill.” or “If I just work harder it will all turn around, somehow.”
Fourth, what does the business really own? If the only asset your small business has is your skill, knowledge and connections in a particular field, you may want to consider Chapter 7 bankruptcy. This is often the case with personal service businesses, such as consultants, or in installation and repair businesses. In that situation, you simply discharge the debt in Chapter 7 and move on in the same field, frequently just changing the name of your business entity.
Fifth, is the debt simply too big, or the competition too strong? Chapter 7 may also be preferable where there is simply so much debt that the business couldn’t possibly repay even a portion of it no matter what. Chapter 7 might be the better fit when a big-box retailer has opened up in your market and you cannot compete with it, like how Home Depot and Lowe’s crushed most independent hardware stores, or Staples and Office Depot drove many local stationery shops out of business.
Sixth, do my people, and do I, have the skills the business needs now? Chapter 7 might make sense if your company’s workforce doesn’t have the skills they need to compete in the market. For example, your employees might be able to repair rotary-dial phones better than anybody else in the world, but if they can’t repair digital phones or hand-held cell phones, it will be very difficult for the company to compete. Unless you are willing to retrain existing employees or hire new ones, it can be very hard to reorganize your business. The business owner may have mastered the technical skills, but it takes a different set of skills to be a good business owner, and a small business is often run by the person who started it. Just because someone is a great carpenter doesn’t mean they are good at pricing jobs, managing employees or handling the paperwork involved in the job.
Chapter 11 Reorganization
Seventh, what caused this, and can it be fixed? As a small business owner, you should ask yourself two questions when considering a Chapter 11 reorganization:
- What led to the problems you’re currently experiencing?
- Can those problems be solved?
Until you know what really happened, you cannot know if it is fixable.
Eighth, is the business healthy underneath the debt? There are three types of cases that often can work out.
- First, when the business is doing well but there’s just not enough money to cover operations and old debt at the same time.
- A second situation is when the business is healthy but burdened by lopsided long-term leases or contracts - like paying rent on space it doesn’t need or can’t afford.
- A third is when the business is doing well but certain creditors - often taxing authorities - threaten to take the cash or assets needed to keep operating.
There is no single right or wrong answer for every business when it comes to bankruptcy. Choosing bankruptcy over debt settlement is not a knee-jerk decision. Ask all eight anyway. If the lawyer can’t answer them all, you’ve learned something important. Don’t agree to file until you know why. At Delancey Street, our first consultation is free and confidential. If a cheaper option exists, we say so on the first call, and when bankruptcy counsel such as Subchapter V is the better path, we refer owners to a vetted independent attorney.
