At Delancey Street, our expertise lies in negotiations with providers of merchant cash advances, lenders, and creditors on behalf of owners who are behind. We are not a law firm, and when bankruptcy is the better path we refer the owner to an independent bankruptcy attorney. Owners we talk to want to know about Chapter 11 and what engaging a Chapter 11 lawyer involves, before they choose one. Questions such as: “How much does a Chapter 11 case cost?” “Why is it so expensive?” “I just want to stop the foreclosure / lawsuit / collection, then we can dismiss.” “Can’t I pay a little over time?” These are the kind of questions that Chapter 11 lawyers for small and mid-size businesses hear in that first interview with a prospective client. They are fair questions, but the answers are often not what an owner wants to hear, and most of them come back to how a Chapter 11 lawyer gets paid. Here are seven things to know first.
They Have to Get Permission Before They Can Be Paid
The first is that once a Chapter 11 case is filed, lawyers who represent the debtor corporation or the company that files for bankruptcy can’t get paid. Or, more precisely, they have to get permission before they can be paid. That means notice to the parties in the case and approval from the Court. This includes not only legal fees that the lawyers charge the debtor and its estate, but also expenses that the lawyers advance on the debtor’s behalf. It includes drawing on the retainer, too. It all comes under close scrutiny. Both the U.S. Trustee and the Judge conduct a careful review of the detailed bills before approving them.
Second, the wait. Most chapter 11 lawyers don’t get the green light from the court to demand a fee and expense reimbursement until they’ve waited at least 4 months from the date the petition was filed. It’s more common for the wait to be 6 months or longer. If the fees and expenses outstrip the retainer the lawyer is holding and the client can’t pay the difference, the lawyer bears the risk.
Third, in Chapter 11 the lawyer’s fees and expenses will be treated the same as the other expenses of the business during the Chapter 11 case. If the business runs up expenses during the Chapter 11 case that it can’t pay at the end of the case (landlord, vendors, utilities, etc.), the lawyer may have to return some of the retainer to cover those expenses.
Fourth, there is the risk that the bankruptcy may turn into a Chapter 7 bankruptcy, in which case the Chapter 7 expenses will have priority over the Chapter 11 expenses. And more often than not, the assets will be consumed by the Chapter 7 expenses, so the Chapter 11 lawyer’s fees and expenses will go unpaid.
Fifth, if the business has a secured creditor who holds a security interest in the business’ cash and accounts, then there may be no free and clear money to pay the lawyer. The lawyer may need the creditor’s permission to get paid. In addition, a lawyer representing a Chapter 11 debtor may not withdraw without court approval. Put those rules together and you can see why Chapter 11 lawyers now ask for a significant ”up-front” retainer as a condition of their representation in a filing. Typically, they assess the nature of the business and the problems that prompted the filing, and ask for a fee sufficient to cover the first few months of the case.
Within the First Few Weeks of the Filing
Sixth, the first few weeks are a lot of work. Consider a small manufacturing or retail business that has been hit hard by the economy. Within the first few weeks of the filing it prepares detailed schedules that provide a complete picture of the company’s financial situation: historical financial information, the identity of every creditor and the amount of each debt, and the identity of all assets. It compiles a list of prior payments made to each creditor, including the insiders. In addition, within the first few weeks, the company must prepare and file certain other documents with the U.S. Trustee, including bank statements, a budget, tax returns, balance sheets, profit and loss statements and more. The U.S. Trustee calls a meeting with the business (usually within 2-3 weeks of the filing). A meeting of creditors occurs about a month after the filing. If there is a secured creditor with a security interest in cash and accounts, a motion has to be filed and a hearing set for the use of the business’s funds. Emergency motions may be necessary to keep utilities from being disconnected, the authority to pay employees or for keeping bank accounts. In addition, the first monthly report is due and the first U.S. Trustee fees get billed. All of this is required in every Chapter 11, small business or large manufacturer. For the owner who only wants to stop a foreclosure and then dismiss, note this: Even if the company wants to dismiss soon after filing, the Court and U.S. Trustee normally require most or all of it be done as a condition of dismissal.
Experienced Lawyer
Seventh, experience is worth paying for. Plenty of lawyers will happily take on a Chapter 11 case for a small retainer. Often they have little or no experience. They want any fee, no matter how small, or they want the experience. Those cases virtually always fizzle out within a short period of time. If you have a viable business, it’s critical to hire an experienced lawyer even if you want out of Chapter 11 as quickly as possible. There’s nothing that generates more fees than redoing things over and over again until they’re right, and a lawyer who knows what they are doing can resolve a dispute with a phone call instead of expensive pleadings and hearings.
If Chapter 11 is a possibility for your business, call a good bankruptcy lawyer now for an initial consultation. It will likely be free. If you’re not ready to make the decision yet, call us. Our first consultation is free and confidential. If we think there’s a cheaper option or that bankruptcy makes more sense, we’ll tell you so and refer you to a vetted independent attorney.
