Business Bankruptcy in NYC: 6 Facts About Filing in Manhattan or Brooklyn

If the business is a company, and not a sole proprietorship, the debtor needs a lawyer to file Chapter 11 in New York and to do it right. The bankruptcy is filed in federal court in the Southern District of New York for companies based in Manhattan, and in Eastern District of New York if Brooklyn or Queens. Chapter 7 is for closing the business, Chapter 11 and its streamlined “Subchapter V” are for reorganization and staying open. Know which one you want before you file.

Bankruptcy law is federal. Brooklyn, Staten Island and Queens are all in the Eastern District of New York. Bankruptcies for Brooklyn-based businesses are filed in the Eastern District courthouse at 271-C Cadman Plaza East.

The bankruptcy court in Manhattan says corporations, LLCs, or partnerships must be represented by a lawyer to file Chapter 11, but sole proprietors filing as individuals must first obtain credit counseling from an approved source within 180 days of filing the bankruptcy petition.

A business that is overall profitable can still go into crisis from a few problems, such as MCA, taxes, lawsuits, or judgments. A crisis or distress does not always mean that the business failed. Sometimes it just needs its “capital structure” changed. Before deciding a Chapter 7 liquidation, or a Chapter 11 or “Subchapter V” reorganization, have a lawyer check whether the business is viable. Seek detailed information about its value, cash flow, debts, assets, creditor pressure and future profits.

Chapter 7 is a liquidation. A trustee may take nonexempt assets, sell them, and use the cash to pay creditors. Only individuals get a discharge, so a corporation or partnership gets none. The filing fee for Chapter 7 is $338. A creditors’ meeting usually happens within 40 days of filing the bankruptcy petition, but up to 60 days where there is no regular U.S. trustee staff. Liquidation can make sense for a company that will not keep operating.

Subchapter V and the Regular Chapter 11

Chapter 11 is not a liquidation: the business generally does not close. The court fee for filing a Chapter 11 is $1,738. A more recent wrinkle is Subchapter V, a new form of Chapter 11 for small businesses. It is simpler and gets done faster, but total debts generally cannot exceed $3,424,000. Subchapter V temporarily allowed businesses up to $7.5 million in total debt, but that was temporary, expired in June 2024, and does not apply anymore. At least half the debt must come from business activity. Guarantees, related companies, real estate holdings, the value of debt in dispute, and various other details can affect whether a business is eligible. A business with a more complex or higher total debt may need a traditional Chapter 11 instead.

Subchapter V assigns a trustee to help work out a plan, but the debtor runs the business. No official creditors’ committee is appointed (though the court can order one if it thinks it needs one). There is usually no separate disclosure statement. There generally is less paperwork.

Filing the petition generally stops or “stays” collections efforts against you while you reorganize the business. The bankruptcy usually stops asset seizures and executions from taking place, because of the ”automatic stay.” Creditors need a special permission, a ’relief from the automatic stay,’ to continue the seizure and sale. The stay makes a big difference. Instead of dealing with lawsuits, bank restraints and collection calls all at the same time, management can focus on stabilizing the business.

In a Chapter 11 case current management usually runs the debtor as debtor in possession. Service continues, employees get paid, but reporting requirements are strict, and certain transactions need court approval.

Steady automatic withdrawals to merchant cash advance lenders and to other creditors can suck revenue away. Folding MCAs, tax debt and leases into one reorganization can help. A debtor may be able to reject onerous commercial leases that are untenable. How a given merchant cash advance gets treated is a fact-specific question. It depends on the agreement terms, UCC filings, liens and pending lawsuits. How tax debt gets treated depends on the type of tax, period and whether a lien was filed.

The Subchapter V debtor generally must file its plan within 90 days, in contrast with the 120-day exclusive period the debtor gets in the regular Chapter 11. Only the debtor can file a plan. A status conference happens within 60 days of filing. With deadlines that short, a debtor in possession does well to have a grip on income, expenses, cash flow, liens, taxes and creditor claims before filing the bankruptcy petition, not after.

There are other differences between Subchapter V and the regular Chapter 11: the debtor may keep ownership of the business even if unsecured creditors do not get paid in full, but the payment plan must be feasible. The judge may ”cram down” a plan that a creditor class votes against, but only if the plan is fair and feasible. General unsecured creditors do not need to get 100 percent. Secured claims, unsecured claims and priority claims are treated differently, and some debts may need to be paid in full. The taxman’s position can have a critical effect on the feasibility analysis.

Personal Guaranties

If the owner made personal guaranties on the corporation’s loans, leases or merchant cash advances (MCAs), the filing of the bankruptcy does not automatically remove that personal guarantee and make the owner safe. Small business owners concerned about debts often also need to protect themselves as individuals. In the melee of trying to save the business they can overlook securing their own finances. The owners must carefully check which debts and guaranties they are exposed to. It is usually not smart to transfer assets or money, or close accounts, without getting legal advice first.

Whether It Should File

Besides where to file, the debtor must also consider whether it should file. Getting the old debts included in the restructuring process can help, but if the restructuring is unrealistic and does not give the business a shot at surviving and thriving, reorganization might not make sense. The question is not only whether the company can file, but whether the restructured business can realistically carry its new debt. Realistic planning starts long before filing the bankruptcy petition.