Business Bankruptcy Attorney: 7 Things to Establish Before Signing the Engagement

An LLC or corporation must have an attorney represent it in bankruptcy court, which means you need an attorney with business-case experience and measurable results, a lawyer who is licensed in your bankruptcy court district and knows its judges and rules, a lawyer who communicates reliably, a lawyer with a clear fee structure, a lawyer with no conflicts, and one that clients like you would gladly refer. The only way to hire the right counsel is by asking the right questions. How many business clients have they had, and what outcomes? How many in the last year? Which courthouse do they tend to use? How often do they report to you, and how? What are their fees and payment schedule, and are there additional costs? Does their firm represent any of your creditors? And, are there any previous clients you can call?

Experience in Your Situation

You want a lawyer with experience in your situation. A business bankruptcy is not like a personal one. There are two paths. You can reorganize your business affairs and try to keep operating under court supervision. This is a Chapter 11 or a small-business Subchapter V filing. Or you can close shop, with the court in charge of selling your assets to pay creditors. This is a Chapter 7, in which a trustee is appointed to get the most money possible for your creditors. Ask the attorney how many business clients they have handled, and what results they achieved. Be on the lookout for patterns. Ask about their three most recent cases. If you have to shut your business down, ask the attorney whether they have run clean shutdowns. Canceling leases, ending contracts, handling liens and who gets paid in what order are top priorities.

A corporation or LLC in Chapter 7 gets no discharge of its debts. In Chapter 11, Subchapter V allows small businesses to reorganize with a plan that’s confirmed by the court. This keeps you running while you manage your debt restructure. But to qualify, your total qualifying debt must be no more than $3,424,000. In Subchapter V cases, a trustee is appointed in every case. Only the business can file a plan, within 90 days of filing unless the court extends it. So ask if your counsel can meet that deadline.

Before you hire a lawyer, ask for one-page summaries of your lawyer’s most relevant past cases - what they started with, what moved in the middle, and how they finished. Ask for a clear statement of work they intend to do for you in the first 60 to 90 days, and a budget to match it, of their services and any additional costs. A plan is how they know if they’re winning. How do you know if your bankruptcy lawyer is winning for you? The measure is, have you stayed open and confirmed your reorganization plan, with payment terms you can meet? Or, have you sold your assets to pay creditors in an orderly way? Ask your lawyer how they define success. Ask them how often they will report to you, monthly or more often. You need to see what your progress is against your goals.

Federal bankruptcy law is the same all over the country, but the way courts apply it varies in each courthouse. You want a lawyer with regular experience in your courthouse, because they know the attorneys and local custom. Judges in your jurisdiction have certain preferred ways of doing things. Make sure any counsel you are interviewing knows your district, and its rules, culture, forms and procedures. Ask which courthouse are they in, and how often they file cases there. Also ask them to explain your first month of the case in plain English, from motions at first-day hearings to trustee asset sales.

To avoid being frustrated by a busy lawyer, ask for a lead attorney and an alternate. Use email to get a written update once a week, and be sure you get same-day responses to emergencies or 24 hours for other communications. Good firms are clear on when they call and when they won’t.

Budget your bankruptcy by phase. A case can be in pre-filing, first-day motions, cash use, plan or wind-down, and closeout. Most attorneys bill hourly; partner and associate rates differ. Ask about fees for outside services. Before the first bill, write out a budget-to-actual report you expect on set dates. Spell out what expenses need your advance approval, and when your retainer gets topped up. Define where your money is held. Set all that in writing, and make sure you are both on the same page.

Bankruptcy lawyers must also tell the court how much money you paid them in the year before filing. If the court thinks your attorney billed too much, they could reduce those fees or take them back. In bankruptcy, once the case is filed, the court-approved attorney can usually ask the court for fees only once every 120 days.

Bankruptcy lawyers must be approved by the court, and must be ”disinterested” with no interest adverse to the estate. Ask who else the law firm represents, and if there is any creditor they have worked for. Ask them if they ever represented any parties who are now opposing you. Before you accept a conflict waiver, ask the attorney to explain it in plain words. Check your lawyer’s malpractice insurance for coverage and expiration date, and ask for their discipline record. Make sure your engagement letter is clear on who the client is, what the legal scope is, and what their hourly fees are.

Ask the lawyer for two references - a current or recent client with your type of case, and a client who had a hard time. Call each and ask about the lawyer’s fees and working style. Ask if their original estimate matched the final bill, who did the work, and if they’d hire them again.

How well you understand your lawyer is just as important as how well they know the law. On your first call with any potential counsel, ask yourself a few questions. Are they answering in English or legalese? Are they alert to your stress and willing to set your mind at ease, or do you still feel apprehensive? Will they push back on your hard questions, or will they make decisions for you that you really ought to decide? Ask if your finance people feel clearer or less clear after that first lawyer call.

Before you sign the engagement letter, compare it with what references told you. How well does the attorney’s actual work match what they described? If it’s unclear, ask them for a clearer example, or narrow the scope of work. You want a team you can work with under pressure.