A Financial Makeover For New York's Bars and Nightclubs: Chapter 11 Bankruptcy
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn..
Owning a bar or nightclub in New York can be tough. Just like with restaurants, most of these establishments never make it past five years. And this day and age, rapidly shifting trends and the steady influx of competition has made turning a profit as a bar or nightclub tough. Even popular clubs with a healthy customer base find themselves in trouble. In some cases, the financial trouble is from mismanagement at the top. In others, external factors are to blame. But the good news is that if you are determined to keep your bar or nightclub open, restructuring your business and paying off your debts through a Chapter 11 bankruptcy might be your best option.
Concerned it may already be too late? By filing bankruptcy, you will be able to temporarily stop your creditors from collecting against you. This even stops the State of New York from shutting down your business over a tax debt. In fact, a bankruptcy filing can help you re-open a business that the state shut down over tax issues.
The possibility of getting a second chance to save her bar after being shut down for unpaid taxes was welcome news to a bar owner I met with recently.
Her bar was her only source of income, and she had dedicated most of her adult life to running it. But she had made some hiring mistakes which led to her alcohol costs skyrocketing due to employee carelessness and theft. To make payroll, she used the tax receipts collected over previous months to keep some of her other creditors at bay. It culminated in the state shuttering her bar due to the unpaid taxes; even going so far as to change the locks on her own establishment.
The bar owner was convinced she could save her business. Revenue had never been the problem, and she believed she was ready to address some of the issues that caused her costs to overwhelm her. But with her doors shuttered, her only chance of re-opening and returning to profitability was through engaging a New York bankruptcy attorney to file for bankruptcy protection on behalf of her business. Despite the possibility of a second chance, the woman had some questions:
- Is filing bankruptcy all that is needed to re-open the bar temporarily?
- How much time will a Chapter 11 buy?
- What if my creditors don’t want to negotiate?
- Can filing for bankruptcy hurt my business or cost me suppliers?
- Is there any way to reorganize without the need for filing for bankruptcy?
These were all good questions, and I was happy to answer all of them for her. If you have questions about restructuring your business through Chapter 11, don’t hesitate to contact me.
High Risk and High Reward in the Bar Industry
New York is one of the toughest places to open a bar or nightclub on the planet. Like the much-publicized failure rate of New York restaurants, newly opened bars and nightclubs fail at an 80% clip within five years of opening.
Competition is tough, and it’s easy to fall into the trap of not investing early returns back into updating the bar. Even long-term profitable clubs are at risk of becoming outdated and not planning for the future. When that happens, Chapter 11 bankruptcy becomes an option for even once-legendary hotspots.
Consider the case of well-known Brooklyn dance club Verboten. After years of alleged fraud and mismanagement, the popular nightspot was abruptly shut down in March of 2016 by the New York tax department. The issue? More than $360,000 in unpaid sales tax. The situation was dramatic; authorities stormed the club, forced it to close, and physically changed the locks to prevent the owners from entering. If this sounds impossible, think again. While the owners certainly received multiple warnings before the tax authorities went to these great lengths, the fact remains that this could eventually happen to your business the same as it did at Verboten and the bar owner I mentioned above.
The tax authority refused to re-open the doors until the bill was paid, and yet, within 48 hours the club was open for business once more. The owners of Verboten didn’t pay their tax bill; they hired an experienced New York bankruptcy lawyer to assist them in filing for Chapter 11 bankruptcy protection. Because of those protections, the tax authority was required to cease all collection efforts and return the business to their owners. The bar owner I referred to above was thrilled when she heard this was a possibility. But this was just temporary fix for Verboten; if your bar is in similar straights you will need a plan to restructure and continue operating.
Restructuring and Surviving
If you file for Chapter 11 protection for your business, you will get more than just a momentary pause to keep your business operating. More importantly, you will get an avenue to restructure your business and survive moving forward. To fully take advantage of the Chapter 11 protections, you will need to enter bankruptcy with a plan for correcting any management mistakes, evaluating your relationship with your suppliers, and potentially settling any tax liability you have.
Renegotiating with Creditors
If your bar or nightclub is facing hard times, it’s likely you are behind on paying some or all of your suppliers. That can lead to strained relationships with many of your creditors. Through the bankruptcy process, you may be able to avoid many of these debts, with some of your creditors getting paid pennies on the dollar.
But you don’t need to be told that without a food and alcohol, you don’t have much of a bar. That means maintaining a relationship with your suppliers is a necessary part of the bankruptcy process. While no creditor of yours will be thrilled when they get notice of your bankruptcy, many will understand that if the end result is a healthy, paying client the process will be a success. For others, the prospect of receiving even a partial payment is appealing at this point. Negotiating past debts and future relationships is something that I can help you with.
Thankfully, the Chapter 11 bankruptcy process is the perfect opportunity to negotiate these business-saving changes. During bankruptcy, your bar’s debts can be restructured in a way that you can afford to pay them in the future. This can mean more than just a reduction in what is owed. A bankruptcy attorney may be able to negotiate lower interest rates, have fees waived, or even obtain more favorable terms with your supplier.
There are a lot of moving parts in a Chapter 11 restructuring, and ultimately the entire process must be approved by the U.S. Trustee and the bankruptcy court. To get everyone on the same page, you need an experienced New York bankruptcy attorney experienced in sophisticated business restructuring.
Catching Up on Back Taxes
Just like in the Verboten case, unpaid sales tax bills can be a killer for New York nightclubs and bars. The bad news is that you cannot discharge your sales tax like other debts through the bankruptcy process. What’s worse is that in some cases you could be personally liable for sales tax debts incurred by your business. The best bankruptcy attorney in the world can’t force the State of New York or the IRS to forgive your tax debt.
The good news is that it is possible to negotiate your tax debt just like you can with your other creditors. This is especially true if your total tax burden is low or if it is clear that there is no way you can pay back the full amount of the debt and stay in business.
In certain cases, the IRS will agree to an Offer in Compromise. This can include a restructuring of your unpaid sales tax spread out over several years. In some cases, it can also include serious reductions in the total amount of taxes owed. If your tax debt is a major part of what is killing your business, restructuring through a Chapter 11 may be your only chance at a fresh start.
Structured Settlements vs. Chapter 11 Restructuring
I could tell that the possibility of a Chapter 11 restructuring was giving the bar owner I was speaking with hope, but she clearly had some reservations.
“I’ve never failed at anything, and bankruptcy seems like failure. Can’t I just work this entire mess out without filing for Chapter 11?”
And the answer I gave her was yes, you can. There is an entire industry dedicated to restructuring debts outside of bankruptcy. In fact, my firm handles corporate restructuring outside of bankruptcy repeatedly. In some cases it makes sense. But in other cases, the automatic stay afforded to you by filing for bankruptcy is the only thing that can keep the doors of your business open. This is true even in less extreme examples that don’t involve the tax authority locking you out of your own place of business.
The major drawback to operating outside of the bankruptcy courts is that a single creditor can wreck your restructuring plans. There is no requirement outside of bankruptcy that your creditors negotiate with you, and if one refuses to hold off on collection efforts in order to renegotiate your debt you are unlikely to succeed in restructuring your business.
In the case of the bar owner I spoke to, the collections process was already well under way against her bar. In fact, with the tax authority seizing her business, she was nearly out of options. But with the help of the Bailyn Law Firm, I believe she has a shot at starting over with a business strategy that can succeed long term.