Delancey Street is a business debt settlement company that works with merchant cash advance funders, lenders and other business creditors on behalf of business owners. But we’re not a law firm. For some of our clients, the best solution is bankruptcy. When that’s the case, we’ll refer them to independent business bankruptcy counsel. Chapter 11 bankruptcy is a legal process where a business can restructure its debt while remaining in operation. But you don’t just jump into bankruptcy without evaluating your options. Here are eight questions that will help business owners prepare for their first consultation with a Raleigh business bankruptcy lawyer.
Is Chapter 11 the Right Choice?
The first question is the obvious one: Is Chapter 11 the right choice? Chapter 11 is available to businesses, single-asset real estate entities, nonprofit organizations and individuals with high debt. It is difficult to determine whether filing for Chapter 11 is a good idea. A good attorney examines your case in depth, discusses all of the available options with you and honestly tells you whether it makes sense to file for Chapter 11. If you own a personal service business or one that does not require a great deal of capital, it may be a better strategy to simply close up shop and start a new business.
Second, ask what protection you get the moment you file. Filing a Chapter 11 petition grants the debtor immediate relief from creditors’ collection activities, known as an automatic stay. This temporary relief protects you from creditor activities such as foreclosures, evictions, levies and lawsuits. This serves as an emergency protection when your business needs immediate help. The debtor retains control over its financial affairs and day-to-day operations, but actions outside the ordinary course of business require court approval. You want to hear specifics about what the stay covers and how it can be used to give the business breathing room.
Third, ask about your exit strategy. What would you need to do to reorganize? Do you need to liquidate assets, and if so, how would you sell them? What parts of the business are not profitable, and can you abandon or jettison them? A Chapter 11 can restructure your debts by cutting down the interest rate, extending the repayment period and reducing the principal balance. It can give you more control over how you sell any assets you choose to liquidate, and at least five years to pay the tax debt. The plan of reorganization is a key document in your bankruptcy. Once you file it, your creditors have a chance to vote it up or down. Sometimes, even if they vote against it, the court can still approve it. And once the plan is confirmed, it becomes the new agreement between you and your creditors, binding everyone in its terms. You want to know how the lawyer is going to build that plan and what the fallout will be if your creditors don’t like it.
Surviving the Process
Fourth, ask the hard one: Does your company stand a chance of surviving the process? Chapter 11 protects your business from your creditors, but it does not protect you from losing your customers, your employees and your vendors. You and your managers better get ready to deal with the stress of trying to run a business during bankruptcy. Chapter 11 is complicated, and it takes time and commitment. You will have to file operating reports and bank statements with the court every month during the pendency of the case, which usually lasts 5 to 12 months.
Fifth, ask whether you have enough capital. In a Chapter 11 bankruptcy, a company must figure out how much money it needs - or can raise - to make it through the reorganization process. It can raise cash from current operations, the liquidation of assets, debtor-in-possession (DIP) financing, and cash collateral. Pre-bankruptcy bank accounts are closed and new debtor-in-possession accounts are opened. Ask where the attorney thinks you can get the money and how much you might expect to need.
Sixth, ask how much scrutiny you will be under. If your company files Chapter 11, it becomes fodder for the public and comes under the scrutiny of the courts. Executives, board members and other insiders can be haunted by their dealings with the company, whether they were preferential payments, fraudulent conveyances and the like. Once the petition is filed, Bankruptcy Court must approve executive compensation. You’ll also have to provide a tremendous amount of detail on assets, liabilities, income, expenses and recent financial activities, and schedule meetings with the Bankruptcy Administrator’s office. Ask the lawyer how much scrutiny they think your situation deserves.
Seventh, ask: How much will a Chapter 11 bankruptcy cost? Owners who are already short on cash may not be able to manage a big lump-sum cost. Chapter 11 can be an expensive option. Besides the filing fee, you will have to pay the court a quarterly fee, and the attorneys’ fees, paid either before or after the filing, can range anywhere from $12,000 to $25,000. Fortunately, some Raleigh attorneys offer flat-fee structures for Chapter 11 cases. Either way, a good bankruptcy lawyer should be happy to explain costs in detail.
Eighth, ask whether you qualify as a small business debtor. Small business debtors (generally, businesses that owe $2,566,050 or less in non-contingent, liquidated debts) get a few breaks to make the Chapter 11 process easier, cheaper and faster. They must file their last federal tax return, and their balance sheet, operations statement, and cash flow statement, and they’re interviewed by the U.S. trustee, who will then keep an eye on them. They get 180 days (as opposed to 120) to come up with a plan before creditors can file competing plans, and then they have 300 days to file that plan (unless the time gets extended). They don’t have to file a disclosure statement, which saves them time and money. Your attorney should be able to tell you whether you can qualify. And if you do qualify, they should explain what that means.
Negotiating with Your Creditors Outside of Court
If the lawyer tells you that Chapter 11 is not right for you, or that it is more expensive than you can afford, you may want to consider negotiating with your creditors outside of court. We negotiate with funders and lenders for less than the full amount owed, and we never sell another loan. Our first consultation is free and confidential, and if there’s a cheaper option or bankruptcy is the right move, we tell you on the first call.
