Chapter 11 bankruptcy: Discover the six things a business tenant needs to know

Six things a business tenant needs to know about filing for Chapter 11 bankruptcy

If your business’s financial situation is dreary, you may need to consider filing for bankruptcy. If your business leases space (or equipment) in order to operate, your landlord could be the biggest obstacle in your case. Businesses can file either a Chapter 7 bankruptcy to dissolve and stop operations or a Chapter 11 bankruptcy to reorganize debt and get back on track. For this reason, Feher Law wants to let you know the six things a business tenant needs to know about filing bankruptcy.

  1. Schedule your debt correctly.  A debt is a past-due amount that is owed to your landlord. It is important to know how much is due to your landlord as of the date that you will file for bankruptcy. This amount should include any past-due rent, late fees, and any other costs you were required to pay to the landlord. The best tip is to obtain the specific past-due amount from your landlord.

2. Schedule your assets correctly. When you file for bankruptcy, you must list your assets correctly. If you paid your landlord a rental deposit, security fee, or pre-paid rent, that is an asset and should be listed appropriately on your bankruptcy schedules. The best tip is to obtain the exact amount you prepaid to your landlord and to list the amounts according to the amount and the category of what the payment was for.

3. Decide what your plan is for the lease. When you file bankruptcy, you will need to determine whether you will assume (keep) or reject (surrender) the lease.

If you decide to assume the lease in the bankruptcy, you will most likely be filing a Chapter 11 bankruptcy, so you can reorganize your business and get back to work. Your requirement is to catch up on any debt and past due amounts AND pay the ongoing current rent amount at the same time. It is important that you are familiar with the finances of the business in order to review whether the business will be able to make the payments to catch up and pay the ongoing amount at the current contractual rate. Otherwise, if your business will not be able to pay both amounts, your bankruptcy case may not be successful.

If you assume your lease, filing a Chapter 11 bankruptcy can prevent the business’ eviction. In order to properly assume and catch up on your rent payments, you must have the following information available and properly listed in your bankruptcy documents:

  • What is your monthly rent payment?
  • When was the last month you paid your rent?
  • Did your landlord obtain a “Final Judgment” from the state Court?

With this information, you can calculate how behind you are in your rent payments. The monthly rent payment multiplied by the number of months you have not paid your rent is your debt to the landlord. For example, if your rent is $1,850.00 and you last paid your rent in October 2020, your debt to the landlord is $14,800 ($1,850 x 8 months).

In order to assume the lease and catch up, you will need to pay back the entire sum of $14,800 as well as pay $1,850.00 per month going forward. If your business reorganizes in a Chapter 11 bankruptcy in a five-year term, your rent payments will be at least $1,850 + $250 ($14,800 divided by five years, divided by 12 months) = $2,100 per month.If you decide to reject the lease in the bankruptcy, you must pay the contractual rent payment until you formally reject the lease and you vacate the premises. Often times, an experienced bankruptcy attorney will reject the lease in your initial bankruptcy paperwork.

The second piece of rejecting the lease includes actually leaving and vacating the premises. Unless and until you vacate the premises, you will be required to pay the post-petition rents that become due. This will be true even if you initially tried to assume your lease in the Chapter 11 bankruptcy case. The rent must be paid at the contractual rate. It is also important to understand that rejecting the lease could lead to other issues in your case.

4. You are responsible for post-petition expenses. An expense is an amount that accrues in the normal course of your business’s operation. For example, your utility payments and phone payments are ongoing expenses for your business. After you file for bankruptcy, you will be responsible for any post-filing date rent, regardless of whether you decide to assume the lease or reject the lease.

5. The automatic stay protects your business against lawsuits and collecting on a debt once you file for bankruptcy. After you file bankruptcy, creditors (including landlords) must stop all collection efforts against you for a period of time, unless the landlord get permission from the bankruptcy court to continue their collection efforts. This protection from collection efforts is referred to as the “automatic stay.” The automatic stay applies in Business Chapter 7 and Chapter 11 bankruptcy cases. However, if your landlord as a Judgment of Possession against you, the automatic stay will not protect you and your landlord can enforce judgment and eviction. For this reason, it is extremely important to file bankruptcy BEFORE your landlord gets the Judgment of Possession from the state Court/eviction judge.

6. Is there a personal guarantee? Sometimes we forget that when a business struggles financially, creditors can go after people who signed a personal guarantee for the business. Types of guarantees include anyone who is a co-signer or signed a formal promise to pay the debt of the business if the business is unable to pay their own debts. When your business struggles financially, the people who signed personal guarantees will be at risk for collection. If you are unsure as to the personal guarantees for the business, review your lease, your credit card agreements, and any other debt agreements the business has.

Meeting with an experienced bankruptcy attorney can ease your fears and ensure your paperwork, and most importantly your debts are listed correctly. There is no substitution for the advice an experienced bankruptcy attorney can provide. There is a great value in the fees you pay for an attorney to handle your paperwork correctly and counsel you about your debts and expenses. For more information for bankruptcy basics, review the Bankruptcy Court’s information HERE. Contact Feher Law to set up your Chapter 11 bankruptcy consultation on our website, at 727-359-0367, or Kfeher@FeherLaw.com.

Share Post

Share on facebook
Share on twitter
Share on linkedin