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  • Writer's pictureBrett Weiss

When to File for Chapter 11--Business Edition

Timing the filing of a Chapter 11 reorganization can be complex, but can also be one of the most important factors in determining the success of a business case. Filing too soon can be as bad as filing too late. And the factors that bankruptcy attorneys consider in deciding when to actually file may not be those that you think of. Here are some thoughts to consider:

1. Sometimes, You Can't Pick When to File. If there's an attachment, a garnishment, a foreclosure, or an eviction that is just about to happen, and you absolutely must stop it, you may not have the option of delaying a filing.

2. Should You Wait Until You're Broke? This actually is a very common question. Many businesses (and individuals) think that they should almost literally be down to their last dollar before they speak with a bankruptcy attorney. In most cases, this is a bad idea. Most businesses who successfully reorganize through a Chapter 11 aren't broke when they file. The more money you have on hand, the more likely it usually is that the reorganization will be a success. Why? Because filing for bankruptcy takes money. You have to pay your legal fees and the court costs. You need cash to be able to survive the period between filing and confirmation. You need cash to be able to continue buying your supplies, paying utilities, and insurance, and employees, and rent, and...well, you get the idea.

3. Does the Day the Case is Filed Matter? Most business bankruptcies are filed on Friday. Why? Because employees are usually paid on Friday, and by paying them before filing but before after their wages are due, you avoid their having an administrative claim for their unpaid wages. You also avoid angry employees who are more likely to quit than run the risk of missing another paycheck.

4. Should I Wait Until Right Before a Foreclosure/Garnishment/Attachment/Lawsuit Before Speaking with a Bankruptcy Attorney? Lots of my clients do. And it doesn't make their case any easier; it usually makes it harder and more expensive. Speak with a bankruptcy attorney early. You don't have to file then. But you can educate yourself on what you should be doing to prepare for a filing, and you have more options to avoid filing the sooner you speak with a lawyer. It also takes time to get together all of the information and documents and negotiate some of the "first day motions," such as cash collateral and critical vendor, that are needed to file.

5. What Bills Should/Shouldn't I Pay Before Filing? While there are some general rules--pay insurance and employees--even these general rules may differ depending on the details of your case. You may need to pay a single-source supplier, for example. If if you'll have to lay off employees, you might not want to pay everyone. The timing is also essential; if you will be filing next week, my answer may be different than if you're filing in a few months. You might not want to pay rent if you'll be filing soon and moving or closing your offices. Some things paid during the 90 days or one year before your case is filed could be considered preferences, which may be recovered during the case from the person or entity you paid.

So the short answer is, speak with an experienced bankruptcy attorney -- us! -- as early as possible, and take our advice about when best to file.

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