No matter how well-run, at any moment a business can encounter problems that render its debt unmanageable. We’re a business debt settlement company, not a law firm. At Delancey Street, we negotiate with merchant cash advance funders and lenders for business owners. There are, however, times when it makes more sense to file for bankruptcy, and when that is the case we refer business owners to vetted independent bankruptcy attorneys. But walking into a lawyer’s office for the first time may be intimidating, especially if you are a business owner focused on operating your company and not on legal matters. So we’ve put together a list of eight questions to ask any business bankruptcy lawyer in Texas so you’re well-prepared before you get into the office.
Which Chapter Do I Need to File?
When you sit down with a Texas business bankruptcy lawyer, the first question you should ask is: ”Which chapter do I need to file?” Federal law provides for Chapter 7, Chapter 11, or Chapter 13, but for business bankruptcy, most companies end up filing either Chapter 7 or Chapter 11. In certain cases, a sole proprietorship or other small business structure may be able to file a Chapter 13. Which chapter is best for you depends on a number of factors unique to your business. A good lawyer will go through the factors for you.
The second question follows from the first. Ask your attorney how your plans affect your options. If your goal is to get out from under your debts without a repayment plan and start fresh, Chapter 7 might be the right call. Do not go into that meeting without a clear idea of your own goals.
Third, ask: Will you examine my personal finances as well? In certain types of businesses, and depending on the structure of the business, you may be able to discharge business debts in a consumer (personal) bankruptcy. The good bankruptcy lawyer examines your personal and business finances and then explains the advantages and disadvantages of each type of bankruptcy, so you can make a choice based on the facts. If the attorney focuses only on the business, that’s a warning sign.
Fourth: What if there is a lawsuit against my business? A lawsuit is the kind of distraction that can make running the business even more of a challenge. This can include lawsuits brought by suppliers for unpaid bills, contractual disputes, government enforcement actions for regulatory violations, intellectual property disputes, and disputes between co-owners or investors. When a business is already in a precarious financial position, a lawsuit can be the catalyst that pushes a business over the edge and into collapse. Litigation can be expensive and a big judgment can shut your doors forever.
Don’t panic; if you file, the bankruptcy automatically stops these lawsuits from going forward. That’s because an automatic stay goes into effect on your debts. Creditors have to stop their collection activities, including active lawsuits and existing judgments. If you run your business as a sole proprietorship, debts and claims against you can be discharged in Chapter 7. If the business is a corporation or LLC, certain factors come into play that affect whether or not the judgment can be discharged. Ask your lawyer how this applies to your situation because every case is different.
Fifth: Am I personally responsible for business debts? That depends on your legal structure. A sole proprietor is not a separate legal entity, so you are equally liable for personal and business debts. In a general partnership, each partner is personally liable. In a limited partnership, the general partner is liable, but the limited partner is not. If your business is an LLC, its owners are not personally liable for its debts, unless they personally guarantee a debt. If you formed a corporation or an LLP, the answers are a bit more complex. Corporate shareholders are generally shielded from the company’s debts, but they might be held personally liable for them if a creditor can prove that certain required formalities weren’t observed. An LLP, by contrast, is set up to protect all partners from personal liability, but depending on the state, that protection might be limited to negligence claims, so partners may still be on the hook for business debt. Don’t forget to bring your formation documents and any guarantees you signed.
Sixth: After I file, will my creditors still be able to collect? A creditor or plaintiff may ask the judge to lift the automatic stay, to let them keep pushing forward on the lawsuit or collect the judgment. If the debt is dischargeable, the judge will most likely deny the request. The creditor could file an adversary proceeding in bankruptcy to argue that the debt should not be discharged, but the grounds for non-discharge are quite narrow and difficult to establish. The creditor may have to demonstrate, for example, fraud, material misrepresentation, or other bad acts. Ask your lawyer if any of your creditors might try it.
Seventh, ask: Will I have to pass the means test? The means test applies to people whose debts are primarily consumer, not business, debts. It requires people who have the resources to repay all or part of their debts to do so. In practice, it is typically based on income; if your income is too high you won’t be eligible to discharge all your debts in Chapter 7. But if more than 50% of your debt is business debt, you may be able to file Chapter 7 without the means test. (For example, if your business has a broken commercial lease, the unpaid payments for the projected term of the lease can add a lot to your business debt.) Ask the lawyer to add up which of your debts count as business debt.
Finally, ask: What happened? And how do we make sure it doesn’t happen again? Some of the most common reasons small businesses go bankrupt: insufficient cash flow, high fixed costs, bad financial planning, mixing personal and business money, and uncontrolled debt. And uncontrolled debt is a leading cause. A good lawyer should take time explaining the causes and help chart a path forward that prevents this from becoming a permanent pattern. So ask your lawyer what red flags to keep an eye on in the months ahead.
Not every owner who sits down with a bankruptcy lawyer actually has to file. Our senior advisors work with funders and lenders to negotiate settlements for less than the full balance owed, without throwing another loan at you. The first call is free and confidential. We will always tell you if a cheaper alternative exists, or if bankruptcy (like Subchapter V) is the better route, and if so we’ll put you in touch with bankruptcy counsel. In either case, go into the lawyer’s office with these questions.
