The Small Business
Ray Jones owns a small construction business, Ray’s Remodeling, LLC, which specializes in residential remodeling. He pays his employees and buys his supplies in cash each month, incurring no trade debt. Ray becomes sick and is hospitalized for weeks and in recovery for months. He is not able to work and when he is not able to be on-site for the projects, his employees cannot complete the jobs. Customers stop paying on their account when the jobs can’t be completed. A few months later, Ray is recovered and able to return to work and bring in customers. His business bank account, though, is now in the negative, and Ray still has outstanding business expenses that must be paid. He also needs to pay his employees. He turns to a traditional bank for a small business loan, but the paperwork and documents required will take weeks for him to get approved for a loan.
The Business Payday Loan
Instead, he turns to a business payday loan which will put cash in his business account that day, allowing Ray to get his business back up and running. Now Ray's Remodeling has $75,000 in its business account. He can now pay his employees, purchase the supplies he needs for jobs, and continue to run his business. A few weeks go by, though, and now Ray is paying up to $7,500 per week to the payday loan company. He signed an authorization for automatic draft, and they are taking the money directly from the account. Ray can’t seem to keep enough in the account to keep operating the business. He reviews the online contract he signed and realizes that the interest rate on the loan can climb up to 300%. At this rate, he’ll never get it paid.
How to Deal with the Business Payday Loan
Desperate, Ray talks to an attorney about his options. The attorney reviews the documents he signed as owner of the LLC and, although, seemingly unfair, it is completely legal. The attorney tells Ray that he can continue and try his best to pay the loan each week while continuing the business. Otherwise, the attorney suggests that he talk to a bankruptcy attorney. At this point, it may be that a chapter 11 bankruptcy is the only option to stop the automatic drafts from his business account, reorganize his debts and finances, and continue his construction business.
The Small Business Case
After filing a chapter 11 bankruptcy case, the Court issues an order requiring all creditors to immediately stop collection efforts from the business. This is known as the “automatic stay” and allows some time to reorganize debts and propose a repayment plan to creditors. The goal is for Ray to keep running the Ray's Remodeling, LLC and come up with a repayment plan that is favorable both to Ray and his creditors. After the filing of the case, the United States Trustee will schedule an “Initial Debtor Meeting.” This is an informal meeting between Ray, as small business owner, his attorney, the U.S. Trustee and any staff of the U.S. Trustee’s office. The U.S. Trustee will outline certain guidelines and duties Ray will have in the chapter 11 case. Further, the U.S. Trustee will review certain fees that will be due on a quarterly basis throughout the case. The U.S. Trustee will also schedule a “341 Meeting of Creditors.” This is a more formal meeting where creditors can appear and ask Ray questions, under oath. Ray's attorney and any attorneys representing the creditors may be present. With the guidance of his attorney, Ray will be the one that must answer any questions under oath. Although intimidating, Ray's attorney will have prepared him beforehand so that Ray is familiar with the types of questions that creditors and the U.S. Trustee will ask.
What are the Pros and Cons to a Chapter 11 Case?
While chapter 11 may seem the right choice when facing financial difficulty, the downsides should also be carefully considered. Chapter 11 cases are lengthy, costly, and time consuming. Certain administrative duties must be completed. For example, Ray's Remodeling, LLC will have to close its existing business checking and operating accounts and open a new, “debtor-in-possession" account. In addition, the Bankruptcy Court must approve major business decisions such as selling business assets, use of cash collateral, incurring new debt or contractual obligations and retaining professional services from an accountant or attorney. Even so, a business facing enormous debt payments to a business payday loan may need immediate protection under the Bankruptcy Code (the “automatic stay”) to stop these payday loan creditors from garnishing its business account. Under these circumstances, a chapter 11 case may be the right choice. Anyone facing these potential pitfalls of payday loan creditors should consult a bankruptcy attorney about the available options best suited for the business and its owner.