You’ve been sued, or a creditor has levied your bank account, and your first instinct is to find a bankruptcy lawyer today. By the time a potential bankruptcy filer reaches the lawyer’s office, there’s an implicit message in that visit: “I’m probably ready to file.” But bankruptcy is just one of several tools available to you. Should you declare bankruptcy? For some people, yes. But for most, it’s worth considering other options first.
At Delancey Street we negotiate business debt for a living: merchant cash advances, SBA loans, equipment finance, lines of credit. We’re not a law firm, and we don’t pretend to be. But a lot of the owners who call us have been to a bankruptcy lawyer already, or are about to go. Whether the word in your head is Chapter 13 or Chapter 11, what you want is an attorney who understands your situation as well as the law, and can help you make decisions with confidence. Here are five signs you need one, and what each tells you.
The first sign is that you are losing control of something right now. You generally have to file to regain control of the following situations: a pending eviction, a forthcoming foreclosure, or a bank account that has been levied and has already lost money. Those are the easy calls. Time is very much of the essence. In that case, the right step might be to run immediately to a bankruptcy attorney, and the right bankruptcy attorney at that, one who works with businesses.
The second sign is that you’ve just been sued and feel you have to do something today. Most bankruptcies are want-to-file. That means you haven’t lost control of anything yet. For most owners, the pressure is a lawsuit: the sheriff shows up with papers for them, and they panic. The next day, they go see a bankruptcy lawyer. A lawsuit isn’t a decision to file bankruptcy. It’s just a lawsuit. Lawsuits take a long time, usually about a year in Los Angeles. Even if you end up with a bad judgment at the end, it could be better for you to let the timeline unfold. You might be able to settle the case, and the problem goes away. It can make you crazy if you sit and stew on it. But try to resist that urge. You’re not required to go from lawsuit to bankruptcy. A good attorney will weigh what letting the lawsuit run would cost you against what filing would.
The third sign is that you need an honest answer about cost. To go into bankruptcy, you have to be able to afford it. A Chapter 11 reorganization is very expensive. It takes at least $50,000. And the sky is the limit. If you don’t have a dollar today, how are you going to put aside the money for fees you’re going to incur? If you were driving from Los Angeles to Las Vegas, you wouldn’t want to only half fill your gas tank; you wouldn’t want to take the risk of getting stuck in the desert. In the same way, if you were planning on filing bankruptcy, you wouldn’t want to only half finance your case; you wouldn’t want to take the risk of not being able to finish. So if you can’t afford a Chapter 11 proceeding, don’t start one in the first place. Money isn’t the only price, either. The minute you file for bankruptcy, there are lots more people on your case: the U.S. Trustee Program, the court, and your creditors, who have a big stake and a lot of influence on your future. You lose control in other ways when you file for bankruptcy. Some of those losses might not happen if you didn’t file. You need to compare and balance your different losses of control to see if they’re worth it.
The fourth sign is that your business is losing money and you can’t say when that stops. Businesses don’t get to operate in the red during a bankruptcy. You may have a few months of losses before going back into the black, and that’s OK if you can show that the low point is due to the seasonal nature of the business or that orders have come in that will allow a profit in the future. The danger is in how the debt stacks up. Debt the business takes on after filing, to the extent it goes unpaid, gets top priority, on the same level as unpaid legal fees. When a business borrows money without any collateral, the lender is a general unsecured creditor. If that credit comes the day before you file, lenders usually can’t get their money back for years, or ever. The day after you go bankrupt, loans without collateral get top priority. Lenders are entitled to be repaid in full, right away, before you can exit. Pile up too much of that post-filing debt and the ship can’t sail to its goal. The debt makes it top heavy, and the company topples over. The bankruptcy lawyer and the business must work together to make the bankruptcy work. The lawyer can do a lot, but if there’s no profit the lawyer can’t do anything. You want an attorney who looks hard at your numbers before anything is filed.
The fifth sign is that you’ve already made up your mind. You’re probably biased in favor of filing. After all, you’re thinking about it. You might’ve made up your mind already. If you’ve got your heart set on filing bankruptcy, it’s easy to find a lawyer who will do it. But if an experienced bankruptcy lawyer who understands all the bad things that can happen says you shouldn’t do it, think about what that means and maybe listen. One of the hardest things a bankruptcy lawyer has to say is, don’t do it. Your first reaction may be that the lawyer doesn’t know what he or she is talking about, but there may be a better alternative. The attorney you want is the one willing to say it.
Sometimes that better alternative is where we come in. It starts with a free, confidential consultation. If bankruptcy is the best option for you, or if a cheaper option exists, Delancey Street will tell you on the first call, and when bankruptcy is the better path we refer you to a vetted independent attorney. Otherwise, Delancey Street’s senior advisors negotiate with lenders for less than the full balance you owe. Either way, take a deep breath, think about your situation, and see if you have other options.
