Bankruptcy Help for a Business: 6 Sources and What Each Can Do

Six kinds of people will offer a distressed business bankruptcy help, and only one of them can file the case. The others still matter, some a great deal, but an owner who confuses their roles tends to spend the first month of a crisis explaining the same folder of unopened notices to people who cannot act on it.

What follows sorts the sources by what each is permitted to do, what each is good at, and where each stops.

1. Bankruptcy Counsel Is the Only Source That Can Put a Company Into a Case

A corporation or LLC appears in federal court through a licensed lawyer or not at all. The Supreme Court restated the rule in Rowland v. California Men's Colony (1993) as law settled for the better part of two centuries, and bankruptcy courts apply it to entity debtors. A sole proprietor may file as an individual without counsel, though the proprietor who does so is taking on a technical exercise with long consequences.

The profession's obligations are written into the Code, which is a reason to prefer it. Under 11 U.S.C. 329, any attorney representing a debtor must disclose to the court what it has been paid, or promised, for work arranged within the year before the filing, and who is paying, and Rule 2016(b) requires that statement within 14 days after the order for relief. In Chapter 11, where the business becomes a debtor in possession, its lawyers are employed under section 327 with the court's approval and must be disinterested, which means, among other things, that they are not creditors, equity holders or insiders of the debtor; section 1107(b) adds that representing the company before the filing does not by itself disqualify them. Their fees are then awarded by the court under section 330 as "reasonable compensation for actual, necessary services," once interested parties have had a chance to be heard, which is to say that the lawyer who agrees to reorganize a business is agreeing to be paid later, in amounts a judge will review, from an estate whose creditors may object, and that arrangement, whatever its inconveniences for the owner who would like a fixed price, is the reason the lawyer's advice about whether to file at all can be trusted to have been given with the court watching.

Counsel's limits are practical. Good bankruptcy lawyers are not cheap, and the retainer arrives when cash is scarcest. Counsel also cannot promise that a plan will be confirmed, that a funder will accept a class treatment, or that an owner's guaranty will survive untouched. Only counsel can file. That is enough to put this source first.

2. The United States Trustee Program Watches the Case and Advises No One

The Program describes itself as "a litigating component of the Department of Justice" and, on its own description of its duties, as the watchdog of the bankruptcy system. It appoints and supervises the private trustees who administer Chapter 7 and Chapter 13 cases, oversees the trustees appointed case by case in Subchapter V, and approves the credit counseling agencies an individual must use before filing. There are districts where the arrangement differs (Alabama and North Carolina use Bankruptcy Administrators instead), though for most owners the distinction will not matter.

What the Program publishes is useful: the quarterly fee schedule for Chapter 11, the operating guidelines each region issues for debtors in possession, the approved counseling lists. What it will not do is take the owner's side. Its analysts read the monthly operating reports, and its lawyers can move to convert or dismiss a case. The federal judiciary adds a parallel caution: court employees and bankruptcy judges "are prohibited by law from offering legal advice."

3. SBDCs and SCORE Help With the Numbers Before Anyone Files

SBA's resource partners offer what the agency calls "free or low-cost counseling and training." Small Business Development Centers, a network of more than 800 locations, give technical help with financial problems, capital and feasibility studies; SCORE mentors advise "at no cost"; Women's Business Centers offer free to low-cost counseling. The finder on SBA's local assistance page locates the nearest one by ZIP code.

Their value in a pre-bankruptcy setting is the unglamorous work of building projections. A Subchapter V plan must contain a liquidation analysis and projections of the debtor's ability to pay, and a counselor who helps assemble a realistic cash forecast before the first meeting with counsel has saved the owner billable hours. None of these partners negotiates with creditors, settles debts, or gives legal advice. They are planners, which is a narrower thing than a rescuer.

4. Free Legal Services Serve Individuals, Not Operating Companies

The federal judiciary's page on filing without an attorney points readers who cannot afford a lawyer toward the American Bar Association's Legal Help directory and the Legal Services Corporation, noting that they "may qualify for free legal services." An owner filing personally over guaranties might qualify. The company will not find its counsel there.

The same page describes petition preparers, who "can only enter information into forms," and 11 U.S.C. 110(e)(2)(A) forbids them to give any legal advice, including whether to file or under which chapter. The cheapest help is often cheap for a reason.

5. Accountants Build the Record a Court Will Read

A small business debtor in Chapter 11 must attach to the petition its most recent balance sheet, statement of operations, cash-flow statement and federal income tax return, or a sworn statement that none exists. Few owners have all four current. The accountant who assembles them also sees what counsel needs to know about taxes: withheld payroll taxes that an unpaid IRS can assess against a responsible person under 26 U.S.C. 6672, and the treatment of canceled debt, which the IRS says can be taxable income, subject to exclusions for bankruptcy and insolvency that carry their own requirements.

Once a Chapter 11 case begins, an accountant working for the estate is a professional employed under section 327 and needs the court's approval. The bookkeeper who knows the business best (and owners will insist no one else could reconstruct the ledgers) may be the person the disinterestedness test excludes, since the Code's definition bars anyone who was an employee of the debtor within two years before the filing. A financial advisor faces the same analysis. The work can still be done; the question is who is allowed to be paid for it from the estate.

6. Settlement Companies Work Outside the Courthouse Entirely

A debt settlement company negotiates balances by agreement. It files nothing, and no automatic stay attends its work; a funder that prefers to sue may still sue. Delancey Street is one such company, focused on merchant cash advances, and not a law firm; its first review carries no fee and stays confidential, and when a matter turns legal it brings in attorneys who practice independently of it.

The honest limit belongs here. A business facing a bank restraint or a levy, a secured lender ready to take its collateral, a creditor who will hold out against any deal, or tax debts that dominate the balance sheet usually needs bankruptcy counsel before it needs a negotiator. Where the trouble is a stack of advances and a few creditors willing to talk, Delancey Street can price a settlement route that the owner may want to compare against a filing.

The Sequence Matters More Than the List

Most owners call these sources in the order they happen to find them. A better order starts with whoever can tell whether a deadline is running, which usually means counsel, and saves the planners for the weeks in which a plan or a proposal is being built. The folder of notices has not changed. The people reading it have.