Most of the owners who call us at Delancey Street want to talk about merchant cash advance debt, but sooner or later the word bankruptcy comes up. If you are weighing Chapter 11, it helps to know what filing involves: a business has to submit multiple pleadings, forms and supporting documents to the U.S. Bankruptcy Court, and gaps in that filing can delay the case or potentially even put it at risk. If your company is struggling, so is your paperwork. Therefore, it is wise to review the basic elements of filing before sending a Chapter 11 petition to the court. Here is how it breaks down into seven steps.
Step one is to bring in counsel and learn the calendar. The smart way to approach Chapter 11 is to enlist experienced bankruptcy attorneys. But that doesn’t mean you should keep your role limited to reviewing and signing papers. At a high level, there are three important deadlines for businesses seeking Chapter 11 relief. The first is the date they file the bankruptcy petition. If a business fails to meet the bare minimum requirements for filing, then it can cause problems before the process has even started. Chapter 11 debtors have a 14-day deadline to file additional paperwork (if it wasn’t submitted with the bankruptcy petition), and then there’s a 120-day deadline after filing. If we had to pick one function performed by the lawyer you hire to file a Chapter 11 case, it is to make sure these calendar dates are adhered to.
Step two is the petition itself, the Voluntary Petition for Non-Individuals Filing for Bankruptcy, which is the main document a business uses to ask for Chapter 11 protection. In addition to the regular identifying information, you also have to include info about your bankruptcy history (if you have one), confirm that you’re eligible to file in that court, and provide some basic info about your assets and debts. You’ll also need to state if you’re filing for small business bankruptcy and if you’re including a reorganization plan with your petition.
Step three is the signature. It needs to be from an authorized representative of the company, someone who has authority to act on its behalf. By signing, the person says, under penalty of perjury, that the business is asking for relief under the Bankruptcy Code, that the person is allowed to sign the form, and that the person read the form and has reason to believe it’s correct. This is not the place for surprises.
Step four is gathering the documents that go in with the petition. If you file for Chapter 11, you have to attach a list of creditors with the 20 biggest unsecured claims who aren’t insiders, a disclosure of what you paid the bankruptcy petition preparer, and a creditor matrix file. If it’s a small business bankruptcy, you need to include a balance sheet, statement of operations, cash-flow statement and federal income tax return.
Two Weeks to File a Bunch of Other Forms
Step five is the first part of the package due within 14 days. As soon as your business starts a Chapter 11 case, you have two weeks to file a bunch of other forms with the court. You can file these forms when you file your petition. Many businesses choose to do this, so they won’t forget the deadline. The Summary of Assets and Liabilities for Non-Individuals is just a summary of important financial information about the business. In order to fill it out, businesses must first fill out Schedules A/B, D and E/F. Schedule A/B covers all assets (real property, vehicles, equipment, inventory, intangible assets, etc). Schedule D has to list all secured creditors. In addition to listing secured creditors, the amount of the debt and the value of the collateral, businesses also need to list anyone else that has to be notified of the filing: collection agencies, assignees and secured creditors’ attorneys. Schedule E/F is for unsecured creditors, those who don’t hold collateral. Make separate lists for unsecured creditors with priority claims and non-priority claims. For priority claims, also disclose the current priority amount. Schedule G covers executory contracts and unexpired leases. Under this schedule, businesses must list all the contracts where they owe ongoing payments. For every executory contract and unexpired lease you’re a party to, you must state: what the contract or lease is for, what your interest is in it, the remaining length, the contract number (if it’s a contract with the government), and the name and mailing address of the other party.
Step six is finishing the rest of that 14-day package. Within two weeks you must also submit Schedule H (codebtors), Schedules I and J (income and expenses), a declaration under penalty of perjury for non-individual debtors, a statement of financial affairs, and a verification of the creditor matrix. Don’t worry if you aren’t familiar with them. If you are consulting with an attorney, this is where that relationship really helps. You don’t want to make a mistake and file the wrong document.
Reorganization Plan
Step seven is the reorganization plan. The reorganization plan is the budget you are trying to make work so you can pay debts back. If the company wants to propose its own reorganization plan during the 120-day period it has the exclusive right to do so, it has to do it by then unless it can get an extension. The business can file its proposed plan with its petitions if it wants. There are other deadlines out there, too. Here are a few, but not all:
- You have 20 days to give your utility company an “adequate assurance” of payment or they can shut you down;
- you have 60 days to start performing under a commercial lease, unless the court orders otherwise;
- you have 90 days to file to take pending state-court cases into bankruptcy court.
As in all legal work, staying on top of deadlines is of primary importance.
Many Options for a Business Struggling with Debt
While Chapter 11 bankruptcy offers a chance at rehabilitation, it is one of many options for a business struggling with debt. Delancey Street is a business debt settlement company, not a law firm. When bankruptcy is the better path, such as Subchapter V, we refer owners to a vetted independent bankruptcy attorney. When it isn’t, our senior advisors negotiate with funders and lenders for less than the full balance owed. A first consultation is free and confidential, and if a cheaper option exists, we say so on the first call.
