We field quite a few calls from Dallas business owners who are struggling with their debt and recommended to simply “file Chapter 11.” Sometimes that really is the best option. And if we feel this way, we provide the client with an independent attorney’s contact information. However, before signing a retainer agreement, a business owner should be informed of what a Chapter 11 case entails, the cost, as well as what an attorney would actually do for them. So, what exactly is a Chapter 11 case? Here are seven things that Dallas business owners should understand before hiring an attorney.
Chapter 11 Proceedings
First, the basics. Chapter 11 is a “reorganization” chapter of the Bankruptcy Code; Chapter 11 allows the business to keep operating while it receives some protection from creditors. There is no requirement of insolvency or financial distress to file a Chapter 11, but the filing must be in good faith and for the primary purpose of reorganizing the business. A Chapter 11 case may be filed by a business that is solvent or insolvent, and any size, including a sole proprietorship, a partnership, an LLC, or a corporation. The only real limit is practicality: is the cost of the case justified by the benefit? The case is filed in the district where the business maintains its primary place of business or has its principal assets. Creditors, shareholders, and owners are notified of the filing (not published in the newspaper unless of particular interest). Only the creditors, owners, and employees of a small business typically know of the filing. A small business has to turn in much paperwork: list each creditor, all assets, full financial situation, and a disclosure statement approved by the court.
Second, the attorney’s fee. In Chapter 11 proceedings, attorney fees can be quite variable from case to case, depending on the size of the business, the attitude of the creditors, the nature of the reorganization and the concurrence of the owners. In most cases, beyond the simplest, a lawyer will charge by the hour and demand a retainer. Fees for a simple case may start at $15,000; for a complex case, many times that amount. Any fees, pre-filing or post-filing, must be approved by the bankruptcy court as reasonable. Whether it is an hourly rate or an ask for a flat fee, find out how the attorney establishes this number. If it is the former, what types of costs will you incur in addition to fees?
Third, the court costs. There is a $1,039 filing fee and a fee that ranges from $250-$10,000 per quarter paid to the U.S. Trustee, depending on the amount disbursed. The fees paid to the U.S. Trustee will be due until a plan is confirmed. Debtors who can’t pay the filing fee at the time the bankruptcy petition is filed seldom succeed. Most debtors also have to send periodic financial and operating reports to the U.S. Trustee.
Fourth, the small business option. You can opt to be a small business debtor if the company is engaged in an active business and isn’t primarily a real estate holding company and the debt is not more than $2,190,000 at the date of filing. You must check the box on the petition to do so. A creditors’ committee is not required, deadlines for reorganization plans are shortened, and acceptance of a reorganization plan is simplified. Typically a plan must be filed within 180 days; only the debtor may file a plan within this period.
Fifth, the automatic stay. A Chapter 11 filing will prevent foreclosures, collection actions, lawsuits, even collection calls and letters (automatic stay). However, it will not stop criminal cases or divorce proceedings. Nor will it stay government enforcing police or regulatory powers. You don’t usually have to pay most of your general unsecured creditors until you confirm a plan. That can take between 6 to 12 months. You may still have to pay secured creditors and your suppliers in order to continue to run your business.
Sixth, who runs the business. In Chapter 11, the business generally continues as a “debtor in possession” and operates under the court’s rules and orders. Cash collateral (bank accounts, checks, cash equivalents) can’t be used unless the secured creditor agrees or the court approves. In some cases, a trustee could be appointed to run the business “for cause”, such as “gross mismanagement”, but not in most small business cases. If you fail to perform your duties, your company could have a trustee, or the case could be converted to Chapter 7 or dismissed.
Seventh, the timeline and the vote. There are two phases to Chapter 11: before confirmation of a plan of reorganization and after confirmation. The first phase usually lasts six to twelve months and the second usually lasts three to five years. Creditors vote by classes. A class of creditors accepts the plan if two-thirds (by dollar amount) and at least half (by number) of those voting within the class vote to accept. Before a plan can be confirmed by the court, at least one class of impaired creditors (creditors who are not paid in full) must accept the plan. If no plan is confirmed the case will be dismissed or converted to a Chapter 7 bankruptcy.
A plan may take the form of anything from more time to repay debts to a complete restructuring of the business, including perhaps even an orderly liquidation controlled by the debtor. With a corporation or LLC, the discharge is given upon confirmation of the plan by the court. If the business has a problem with keeping up with the requirements of the confirmed plan, it may be able to have the plan amended if there are grounds; if not the case can be dismissed or converted to a Chapter 7, after which creditors may sue or foreclose.
Be Sure to Ask Your Lawyer
So before you hire anyone, ask. Inquire about the size of the retainment upfront and obtain an honest estimate on the total amount you could expect to pay. It is important to determine whether or not you qualify as a small business debtor under bankruptcy law. Inquire whether or not any secured creditors or suppliers need to be paid during the case. In addition, you will want to determine whether or not you can use the funds held in your business bank accounts (cash collateral) as part of the bankruptcy process. Lastly, be sure to ask your lawyer whether the cost of the case is justifiable for the outcome.
A Business Debt Settlement Firm
Here at Delancey Street, we’re not a law firm - we’re a business debt settlement firm. That means we negotiate with MCA funders and lenders to reduce your debt for less than the balance. We don’t sell you another loan; we aim to settle it. Sometimes Chapter 11 is the better route. If it is, we’ll connect you with a reputable, independent bankruptcy attorney (for example, a Subchapter V specialist). Once we refer you, the attorney - client relationship is theirs. Our first consultation is free and confidential. If we can’t help - or if a cheaper alternative is better - we’ll tell you on that first call.
