Delancey Street is a business debt settlement company. That means we negotiate with your lenders (including merchant cash advance funders) on your behalf. (We are not a law firm). But business owners in Cape Cod and the South Shore who are under debt pressure often start talking to bankruptcy lawyers about Chapter 11. Before you commit to hiring one, it helps to understand how a Chapter 11 lawyer gets paid and what the first weeks of a case look like. That explains the size of the retainer the lawyer will ask for.
If you own a small business and you want to hire a Chapter 11 lawyer, you are likely to ask the same questions over and over during the first few conversations: How much will my Chapter 11 case cost, why is it so costly, can I file just to stop the foreclosure or collection suit and dismiss the case right after, and can I pay a little of the fee at a time? These questions make sense, and they’re understandable, but often the answers to them are not what business owners want to hear. Part of the reason is that lawyers who represent people and businesses that file for Chapter 11 have certain restrictions on getting paid. Those restrictions, and the work packed into the first weeks of a case, are the seven things worth knowing before you sign anything.
The Lawyer Is at Risk for Not Getting Paid
The first is that court approval comes before payment. Just because a Chapter 11 case has been filed doesn’t mean your lawyer can bill you and collect it right away. Even though you probably already paid a retainer, the lawyer can’t just draw on it without giving notice to you, the other interested parties, and getting Court approval. The U.S. Trustee and the Court have to review the detailed fees and expenses before anything is approved.
The second is the wait. Most lawyers are required to wait at least four months before they can even petition the court to approve their fees. It is more common, however, that it takes six months or more for a lawyer to ask the court to give the lawyer permission to collect. If the fees and expenses run up during that time are more than the retainer the lawyer is holding, then the lawyer is at risk for not getting paid if the client doesn’t have the money to pay the balance.
The third is priority: during Chapter 11, the lawyer’s costs and fees have the same priority as any other expense of the business. And if the business gets into big trouble during the case, running up bill after bill it can’t pay - to its landlords, vendors or utility company - the lawyer could end up having to give back some of his or her original retainer to pay for those other expenses of the company.
The fourth is what happens on conversion. When a Chapter 11 case converts to a Chapter 7 case, the Chapter 7 expenses get paid ahead of the Chapter 11 expenses. More often than not, there is no money left after the Chapter 7 expenses get paid and the Chapter 11 expenses never get paid.
The fifth involves your lender. If your lender has a security interest in your accounts and cash, there may be no unencumbered money in which your lawyer can ask to be paid. In that case, the lawyer has to ask the creditor for approval to use it.
The sixth is that a Chapter 11 lawyer can’t simply walk away. They are not allowed to stop representing a debtor without getting the Court’s approval. As a result of all these complicated rules, when you hire a Chapter 11 lawyer, you generally have to pay an initial retainer. For the lawyer, that retainer gives some protection of being paid. Typically, the lawyer looks at the nature of the business and the problems that led to the filing and asks for a retainer that covers the first few months of the case.
The Workload
The seventh is the workload, and it explains a lot about the cost. If you own a small manufacturing or retail operation that’s having a tough go of it and decides to file Chapter 11, here’s what you face. Within the first few weeks after the petition is filed you will have to complete detailed schedules that include historical financial information, a list of your debts and creditors’ contact information, a list of all your assets, and a description of any payments you have made to creditors and insiders. In addition, you will be required to produce certain documents and provide them to the U.S. Trustee: bank account statements, a budget, tax returns, balance sheets and profit and loss statements. In addition, you will have a meeting with the U.S. Trustee within two to three weeks after filing. About a month after filing, the first meeting of creditors is held. If the secured creditor has a lien on cash and accounts, a motion has to be filed and a hearing held to use any of the business’ funds. Other emergency motions may be needed, such as to keep utilities on, pay salaries, or keep bank accounts open. The first monthly reports are due and the first U.S. Trustee fees are billed.
These things all happen in every Chapter 11 case, whether it is a small business or a giant manufacturing company. Many small business owners come to a lawyer wanting to file just to stop a foreclosure or a lawsuit and then dismiss. But even then, the Court and the U.S. Trustee usually insist that most or all of the above happen before they’ll grant dismissal.
Put those seven points together and the retainer makes more sense. For the owners we talk to, the lesson is that if a lawyer demands a big retainer up front, it doesn’t necessarily mean the lawyer is overcharging. The lawyer’s payment is restricted, delayed and sometimes never collected at all. The amount of the retainer reflects the risk the lawyer is taking.
The Records Your Case Will Ultimately Need
When you walk in for the first time with your Chapter 11 attorney, make sure you have the records your case will ultimately need anyways. Think bank account statements, budget, tax returns, balance sheets, profit and loss statements, a list of all your debts and their creditors, a list of assets, and payment records made to creditors and insiders. Ask the attorney how much the retainer is and how many months it’s supposed to cover. You should also tell the attorney about any secured creditors who have claims on your cash and accounts. Finally, don’t forget to let the attorney know if your strategy is to file just to halt a lawsuit and then dismiss your case right away, because dismissing usually still means meeting most of the early requirements.
Chapter 11 bankruptcy is a messy process that takes real money from the very first weeks of the case. If you’re considering it alongside other debt relief options, remember that our first consultation is free and confidential. If there is a cheaper option or a different kind of bankruptcy counsel - such as a Subchapter V case - that is the better route for you, we will let you know on the first call. We are not a law firm, so if a bankruptcy filing is the right call, we refer you to a vetted independent attorney.
