Business Debt Attorney: 6 Situations That Call for Counsel Rather Than a Negotiator

Negotiation handles money that is owed. Counsel handles exposure that is still being decided: whether a claim is valid, whether a transfer can be undone, whether an owner is personally liable, whether a court will intervene. The six situations below are the ones in which a business debt attorney stops being optional, because each involves a decision that a creditor, a court, or the government is about to make.

A negotiator can be useful in every one of them. In none of them is a negotiator sufficient.

1. A Summons Has Been Served on the Business

The Supreme Court described it as the law "for the better part of two centuries" in Rowland v. California Men's Colony: a corporation may appear in federal court only through licensed counsel. A company sued in New York state court has twenty days to appear after personal service, or thirty after certain other methods of service, under CPLR 320(a). The deadline does not pause while a settlement is discussed.

That is the whole analysis. A served company needs a lawyer.

2. A Judgment Has Been Entered and Enforcement Has Begun

After judgment, the creditor's tools are statutory, and each has its own clock. A CPLR 5222 restraining notice binds a served bank until the judgment is satisfied or vacated, or for one year. An execution under CPLR 5230 is returnable within sixty days, extendable in writing. A levy under CPLR 5232 becomes void after ninety days except as to property already transferred or paid to the sheriff, subject to extension.

These papers are answered by motion, by challenge to the judgment, or by a negotiated release that someone has drafted to end the enforcement in fact and not only in conversation. The owner who pays a creditor directly while a levy is outstanding, on the understanding that the levy will be withdrawn, has made an arrangement with no paper behind it. It resembles a lease renewed by handshake in a building that has already been sold: everyone recalls the agreement except the party now entitled to enforce the building's rules.

3. Someone Has Called a Transfer Fraudulent

This is the situation owners least expect and most need counsel for, because the accusation usually arrives after the transfer, when it can no longer be unmade. New York's version of the voidable transactions law, Debtor and Creditor Law 273, lets a creditor set aside a transfer made "with actual intent to hinder, delay or defraud any creditor of the debtor," and it lists the circumstances a court may weigh: a transfer to an insider, a transfer made after suit was threatened, the debtor's continued control of what was transferred, the transfer of substantially all assets. It also reaches transfers made for less than reasonably equivalent value by a business left with too little to operate.

The owner who moved equipment to a new entity, paid a relative's loan ahead of the funder, or closed one account and opened another at a different bank may have had an ordinary reason for each. Whether the reason survives the statute is a legal judgment about intent and value, reached on evidence, and the creditor bears the burden by a preponderance.

The stakes rise if bankruptcy follows. Concealing estate property from a trustee or creditors, or making a false oath in a bankruptcy case, is a federal crime under 18 U.S.C. 152, punishable by up to five years. A negotiator discussing such facts with a creditor is, at best, adding to the record. At worst the conversation becomes the creditor's exhibit, and the owner learns that candor and privilege are not the same thing. Most of what separates a lawyer from a negotiator is visible in this one situation.

But even here the first step is modest: gather the documents of every transfer out of the business over the preceding period, with the reason for each, and bring them to counsel before anyone else sees them.

4. The Guaranty Is Secured by the Owner's Home

A guaranty alone makes the owner a defendant. A guaranty backed by a mortgage on the owner's residence makes the house collateral, which is a different matter. New York's homestead protection in CPLR 5206 exempts a principal residence only up to a dollar amount "in value above liens and encumbrances," so a mortgage the owner granted sits ahead of the exemption, not behind it.

Counsel reads the mortgage, the guaranty, and the business agreement together, since each may define default differently.

5. Payroll Taxes Went Unpaid While Other Creditors Were Paid

The trust fund recovery penalty in 26 U.S.C. 6672 reaches any person required to collect and pay over withheld taxes who "willfully" fails to do so. The IRS describes willfulness as having "intentionally disregarded the law" or been "plainly indifferent to its requirements," and its own examples of willfulness include paying other business expenses instead of the withheld taxes. The penalty equals the unpaid trust fund tax, and liability depends on responsibility and willfulness, not on title alone.

It also survives the business. Under the Bankruptcy Code the penalty is a priority tax that an individual's discharge does not reach, and the company's own bankruptcy does not erase an owner's personal exposure. A funder settlement changes none of this. An owner who kept paying the merchant cash advance with money that should have gone to withholding has a tax problem first and a debt problem second, and needs a tax lawyer before either.

6. Bankruptcy Is Being Considered

The choice among chapters, the treatment of guaranties (the automatic stay protects the debtor, not ordinarily a non-bankrupt guarantor), the eligibility limits, and the question of whether a creditor could ask the court to except its debt from discharge because a written financial statement was materially false are all legal questions. So is the question of whether bankruptcy is premature, which a good bankruptcy lawyer asks as often as the reverse.

When a Negotiator Is Enough

A negotiator alone can suffice when none of the six situations is present: no suit, no judgment, no accusation about transfers, no lien on the house, no unpaid trust fund tax, no bankruptcy under consideration. That describes many businesses that are behind on vendors, cards, or a single advance, and it is where a settlement company earns its place. Owners who search for debt relief attorneys are sometimes looking for exactly this service, and sometimes for the lawyer it cannot replace.

It helps to know what protects the buyer of that service. Since May 16, 2024 the Telemarketing Sales Rule's bar on misrepresentations, including misstatements of how much a customer may save, reaches business to business telemarketing calls, though the rule's advance fee ban does not apply to telemarketing directed at a business, so fee terms are a matter of contract and should be read as one.

Delancey Street belongs in that category of service. A negotiator of business debt and not a law firm, it gives no legal or tax advice; its first review is confidential and costs nothing, and it brings in attorneys licensed separately when a matter calls for one. An owner who recognizes one of the six situations above should call counsel first. The review can wait a day. The court calendar, the county clerk, and the IRS generally will not.