The enemy is at the gates. The coronavirus epidemic caused a massive decrease in revenues, or your lease expired and the landlord wants to raise your rent by an unconscionable amount, or you’ve lost some key employees and they took some of your best clients with them to their new employment, or all of the above… for whatever reason your small business is suddenly the rocks and your phone is ringing off the hook with creditors threatening to take you to court, or padlock your door and seize all your assets. Every day the tide is rising quicky around you…
How I Can Help
The first thing I will do for you as your attorney is ask you the million dollar question: do you want to close your business, liquidate its assets, divide the proceeds among your creditors and ride off into the sunset? Or do you honestly believe that your business can rebound, survive and thrive once again if only you are given some time and some flexibility on the part of your creditors. How you answer these two questions will determine where you go from here.
Chapter 7 Bankruptcy
A business seeking to close its doors forever does not necessarily have to file a bankruptcy petition. Instead, it may be possible for the business, on its own, to negotiate a payoff with its creditors, pay any outstanding legacy taxes (sales taxes, worker’s compensation etc.) and then file the closing paperwork with the Department of State.
But if your creditors are looking for blood and if there are just too many headaches involved for you to try to close your business on your own, filing a Business Chapter 7 bankruptcy might be a good option.
In a Business Chapter 7 bankruptcy, the trustee will stand in your shoes, field any complaints or inquiries from creditors, coordinate the liquidation of your business’s assets and distribute the proceeds to your creditors.
But don’t get the wrong impression. The trustee is not your friend. To make sure you are treating your creditors fairly, the trustee will do a deep dive into your business’s finances to make sure you are disclosing all your company’s assets. They will want to see tax returns, bank statements, customer lists, employee records, accounts receivable, accounts payable, cash-flow statements… you name it. One attorney called it a “financial colonoscopy.” If the trustee finds, for example, that you have emptied out your business’s bank account and sent all the money to your personal account in the Cayman Islands, you could be facing a charge of bankruptcy fraud, which is a federal crime.
So yes, a business Chapter 7 can be a helpful option, but only if you’ve been playing by the rules and running your business the right way.
And one more thing: whether you know it or not, the loan agreements you signed your business’s name probably included a personal guaranty, meaning that if your creditors can’t get what’s owed them through the liquidation of your business’s assets, they will probably come after you personally for the difference. It is often necessary, therefore, for business owners to file a personal chapter 7 in addition to the business chapter 7.
Chapter 11 Bankruptcy and Small Business “Subchapter V” Bankruptcy
If you feel strongly that your business’s difficulties are temporary and that, if you can buy a little time to get your house in order, your revenues will quickly get back to where they were, then you might opt for a reorganization instead of a liquidation.
Up until last year, your only option as the owner of a business seeking to reorganize its debt under the bankruptcy code was to file a Business Chapter 11 bankruptcy, which is an expensive, intrusive, and difficult undertaking.
In February, 2020, however, Congress enacted new bankruptcy legislation which gave owners of small businesses a new reorganization tool that is quicker, cheaper, and generally more practical for small business owners than the old Chapter 11. This new reorganization tool is known as a Subchapter V (where V is the Roman Numeral for “5”) Subchapter V bankruptcies cater exclusively to small businesses whose debt is limited to $2,725,625. The CARES Act of 2020 increased the debt limit to $7,500,000, but that increase is scheduled to expire on March 27, 2021.
Some features of the new Subchapter V are:
• A shortening of the time by which a debtor must file a plan of reorganization from 180 days to 90 days, thus speeding up the process and cutting down on legal fees.
• Elimination of the requirement that a lengthy Disclosure Statement must accompany the Debtor’s Plan of Reorganization, thus also cutting down on legal fees.
• Elimination of quarterly U.S. Trustee fees.
• Elimination of the requirement that administrative fees incurred after the filing of the bankruptcy petition be paid before the reorganization plan goes into effect. Now those expenses (which include attorney’s fees, accountant’s fees, unpaid debt service obligations) can be paid over the course of the reorganization plan.
Be advised that although Subchapter V’s are far more efficient than the old Chapter 11’s, they are still costly and still require a great deal of work on everyone’s part. I will make sure you have a clear and detailed understanding of what is required before you file.