What New York Plumbing And HVAC Contractors Should Know About Bankruptcy
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
If you are a small business owner, I don’t have to tell you that one unexpected setback or liability can be enough to turn your business upside down. This is certainly the case for plumbing and HVAC companies that rely owners and top managers working in the field to stay in business. This can be catastrophic for the company if an unexpected illness or injury puts the owner or a top employee of the company out of work for long periods of time. An injury can complicate what is already a delicate financial situation. Many plumbing and HVAC companies struggle with bad contracts, impatient creditors, and even court judgments. Thankfully, these problems don’t have to spell the end of your business if you are proactive. That’s the advice I recently gave to a long-time plumber who was concerned about losing his business.
The plumbing business owner was quick to tell me that generally, business has been profitable. The last 25 years had been good to his business, and he currently had a few dozen employees and a small fleet of trucks. Like any business, he had creditors that he owed. But for the most part, he made a living, paid his employees, and kept the doors open.
Then, a former employee sued him and won.
The former employee didn’t just work for the business; he was the unofficial chosen successor when the owner planned to retire. But the relationship soured, and the owner fired him. The judge overseeing the lawsuit ruled that the firing, which was done by the owner without consulting an attorney, violated the employee’s contract. The end result: a $300,000 judgment.
The fees for his attorneys were already an expense the plumber wasn’t planning on, and despite otherwise strong revenues there is simply no way for the business to pay out $300,000 and stay in operation.
The owner was distressed about the future of his company, but I assured him all was not lost. I let him know that the protections assured him by Chapter 11 bankruptcy would give him time to restructure his business and potentially renegotiate or eliminate his liabilities. He was intrigued, but understandably had questions:
- Would he be able to pay his employees?
- Would his creditors negotiate with him?
- Is it possible to reduce or eliminate the judgment against his business?
- Is any of this possible without filing bankruptcy?
These were good questions, and I was happy to answer them all. If you have questions of your own, contact the Bailyn Law Firm; I’m happy to answer your bankruptcy questions as well.
Risk vs. Reward in the Plumbing and HVAC Industry
Many industries, including grocery stores and bars, are hit hard during economic downturns. When money is tight, evenings out and expensive groceries are often the first thing to be nixed from a budget. But plumbing and HVAC needs are a little different, given that emergencies can arise. While the industry isn’t recession proof, the truth is that many plumbers reported less economic disruption during the last recession.
That doesn’t mean things will always be easy. Just like we discussed in the circumstances above, a major unforeseen expense can shake a plumbing or HVAC business to its core. But even when mistakes were made, it’s possible that filing for Chapter 11 bankruptcy protections can give a business the fresh start it needs to stay operational.
The Time You Need to Restructure
Arguably the top benefit of filing for Chapter 11 is that you will have a chance to restructure your business while continuing to operate. This is true even if you are behind on rent or in a dispute with a critical vendor. For many businesses, having any downtime could be enough to send them over the financial cliff. Filing for Chapter 11 avoids that pitfall.
A bankruptcy filing won’t magically fix what ails your business, though. You will need a plan to restructure your debts and operate more efficiently than it did before. In other words, you will need a plan. That plan can include negotiating with your creditors, which include anyone that has a judgment against you. It can also involve restructuring leases and other contracts. It can even involve having debt forgiven completely.
Renegotiating with Creditors
If your plumbing or HVAC business is struggling, you likely have strained relationships with your creditors even prior to filing bankruptcy. It can be hard to keep a business afloat, and sometimes as a business owner you will have to make tough choices regarding which creditor is getting paid this month. To keep your business operating, however, you’ll need to be able to work with your creditors going forward. This is true even in cases where those creditors have already began the collections process against your company.
One benefit of filing for bankruptcy is the automatic stay. The moment you file for bankruptcy protections, all current and future collection activities against your company are temporarily frozen. This will give you a chance to negotiate with suppliers and landlords regarding existing debt as well as rates going forward.
One common debt that many plumbing and HVAC companies deal with is rent. A business that has been in operation for years may be in a completely different financial position than at the time they signed their original lease. If you are behind on rent, the first thing that happens during your bankruptcy is any eviction efforts against you are halted. This will give you a chance to work something out with your landlord that everyone involved can live with.
The best part is that a Chapter 11 bankruptcy is a great setting for renegotiating. During the course of your bankruptcy, you will have a chance to restructure your debt in a way that will let you pay your ongoing rent and any overdue amounts off completely by the time your bankruptcy is discharged. It’s also possible that your creditors will agree to write off some of your debt, waive interest rates, or negotiate new terms going forward. It may seem hard to believe, but many creditors will just be happy to keep a paying company or recovering something on account they had written off long ago. These negotiations can be complicated, however. This is especially true if you have a large number of creditors looking for their money. That makes hiring an experienced New York bankruptcy attorney a critical piece to rebuilding your business.
Dealing with Judgment Creditors
Judgment creditors operate the same way as other non-secured creditors. While the judgment they have against you can operate as a lien, they are prevented from attempting to collect against you due to the automatic stay. In many cases where litigation is involved, the relationship between debtor and creditor is far more hostile than a traditional creditor. After all, the debt is based on a disagreement that couldn’t be resolved without a trial as opposed to a long-standing business relationship. Despite that fact, it is possible that Chapter 11 bankruptcy can help you resolve your judgment liens as well. Like other creditors, a judgment creditor may be willing to take a discount on the amount owed in order to get something out of your bankruptcy. Others are simply unwilling or unable to wait the 5-8 years that a Chapter 11 bankruptcy can stretch on for.
This is especially true regarding older judgments. Many judgments contain a provision for post judgment interest. In other words, the amount of the judgment goes up as time goes on. This is intended to prevent a judgment from effectively serving as an interest free loan to the debtor. While every creditor wants their entire debt paid, many are more willing to negotiate over the amount of interest owed compared to the principal debt.
If an agreement can’t be reached, it’s possible your attorney will be able to have the court approve a plan that reduces the total amount of the judgment as part of your restructuring. An experienced bankruptcy attorney can use this fact to your advantage during the course of negotiations with your judgment creditors.
Other Options: Structured Settlements vs. Chapter 11 Restructuring
Most of the answers I had for the plumbing business owner were music to his ears. But the possibility of filing for bankruptcy nagged at him. He was concerned how it would affect his reputation in the close-knit community he services. There is also the reality that, due to a bankruptcy filing, he could be barred from obtaining contracts with the State of New York or the federal government. His final question to me was simple: is there any alternative to bankruptcy?
I let him know that, yes, it is possible to restructure your business and re-negotiate with your creditors without filing for bankruptcy. This process is known as a structured settlement, and it’s something that I often do for clients. For some, it is a better option than filing for bankruptcy. This is especially true if your relationship with your creditors remains healthy, and if you only have a few major creditors to deal with. If restructuring outside of bankruptcy makes sense, it is an avenue I am always happy to assist with.
The reality, however, is that this process isn’t always effective in cases with a large number of creditors or a creditor that is hostile. That’s because a single creditor can hold up agreements with everyone else. If you have a major creditor that still intends to initiate collection actions against your business, it’s unlikely you will be in a position to successfully negotiate with all of your other creditors.
It’s in these circumstances that the automatic stay brought on by your bankruptcy filing is so powerful. It will force difficult creditors, including those who hold a judgment against your company, to the negotiating table. For many businesses, restructuring under the protection of a Chapter 11 bankruptcy filing is the only path forward.
In the end, the plumbing company owner I spoke with seemed satisfied. The judgment against his business, combined with other debts, has pushed his company to the brink of closing. But a fresh start provided by a Chapter 11 filing might be just what he needs to stay afloat. I look forward to the opportunity to guide him through the process, and I would love to discuss your business with you as well.
Questions? Don’t hesitate to contact the Bailyn Law Firm at 646-326-9971 learn about your options.