What New York City Bakeries Should Know About Chapter 11 Bankruptcy
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
Everyone is familiar with the tough times that many bars and restaurants face during an economic downturn. But another service industry that doesn’t immediately jump to mind is the bakery industry. For many, coffee and pastries are a luxury that may not squeeze into everyone’s budget during lean times. What’s more, bakeries face the same difficult real estate market that have led many businesses to shut down despite showing strong revenues year in and year out. I talk to a lot of small business owners, and bakeries face challenges that are just as tough as what many restaurants deal with. The result is the same too; most bakeries shut down within five years of opening.
But it’s not just recent startups that find themselves in a financial bind. Long running New York bakeries like Crumbs Bake Shop have filed for bankruptcy protection multiple times over the years. And while bankruptcy filings by these large operations garner the most publicity, small family-owned bakeries may have a lot to gain by filing for Chapter 11 protections as well.
One of those family bakery owners called me recently. The story was a variation of one I had heard over and over; business had been good. So good, in fact, that the family had recently expanded to a second location. That’s when the trouble started. The second location didn’t bring in the revenue that they had hoped, and the lease has proved to be too expensive to bear. The lease has fallen into dispute with the landlord, who is threatening to evict the bakery from their second location. The owner was deeply concerned; they had a lot tied up in the second location and feared losing it could cost them the entire business. An eviction lawsuit was imminent, and the owner was afraid the business couldn’t be saved.
I was happy to tell him that he still had a chance at a fresh start. The business owner was all ears, so I explained to him that, by filing for Chapter 11 bankruptcy, his bakeries’ creditors would be required to stop attempting to collect. That includes a temporary bar on the landlord evicting them from their second location.
The bakery owner was cautiously optimistic. He believed that with a re-negotiated lease, he might be able to find money to pay his other creditors until the second location became profitable. But he wasn’t convinced. I assured him I could answer any questions he had about a bankruptcy filing and help him start the process if that was what he decided to do. If you have similar questions, contact The Bailyn Law Firm, P.C. and schedule a consultation; I look forward to answering your questions too.
Bakeries and Bankruptcy
New York bakeries are no stranger to bankruptcy. As the city has grown and changed, many bakers found themselves with a customer base that was moving out of their neighborhood. That was the case in 1972 with the once-famous Ebinger Bakery Company. Ebinger first opened in 1898, but a few risky decisions and a shifting customer base were enough to shutter the previously successful bakery.
More recently, the skyrocketing cost of rent in New York City has been a major cause of failed bakeries. The cost of rent has doubled over the last decade in many parts of the city, leading to some famous bakeries to struggle.
Recently, the Swedish-theme bakery and coffee shop Fika has become the most recent high-profile bankruptcy filing in the industry. The chain, which was New York City’s fastest growing retailer just a few short years ago, closed 13 of their 20 locations before ever filing for bankruptcy. According to their bankruptcy filing in March of 2018, they are currently carrying at least $10 million in liabilities compared to only $1 million in assets. The majority of Fika’s creditors are landlords. In fact, they owe more than $250,000 to a single real estate creditor. Despite the deep hole the company is in, they have announced their intention to stay in business and focus on their wholesale business. Such reorganization likely wouldn’t be possible without intervention from the bankruptcy court.
Restructuring your Bakery
Whether you are hoping to keep your business running indefinety or just long enough to find a buyer, hitting the pause button on your creditors will give you the time you need to make some decisions about the structure of your business. But this is temporary relief; to get the most out of your bankruptcy you’ll need to have a solid business plan if you want to continue operating after your bankruptcy discharges. Here are some of the major considerations you must make.
As we discussed already, the high cost of rent kills many otherwise-successful bakeries. Even if you are on solid ground with your other creditors, a dispute with your landlord can be enough to shut your doors for good. It’s possible that your landlord is treating you unfairly in hopes that he can re-rent the space for more money to someone else. Likewise, it’s possible your dispute is an honest one. Either way, the filing of a Chapter 11 bankruptcy will put a halt to any efforts to evict your business. This is possible thanks to what is known as the automatic stay. Upon filing for bankruptcy protection, your creditors will be notified of the filing. From that point on, they are automatically barred from attempting to collect from you until the bankruptcy completes. While the automatic stay is in place, your bakery can stay open for business and operate as normal while you work things out with your creditors.
In the case of the bakery owner I mentioned above, the major issue that was putting strain on his business was the lease on their second location. However, for many bakeries, other types of creditors might make up the largest part of their debt.
Like most service businesses, a bakery will have a variety of suppliers they owe money to. You need everything from flour to cupcake liners to run your business, and it’s possible that if you’re considering bankruptcy your relationship with them is already strained. It’s possible that, as a part of your bankruptcy plan, you will be able renegotiate with these creditors. This can include anything from partial forgiveness of your debt or simply for more favorable terms moving forward.
It may seem unlikely that your creditors would willingly agree to wave some of your debt, or agree to friendlier terms when they haven’t been paid. The reality is that some creditors may have already written off this debt. In other cases, your creditors may have relied on your business for years and are willing to make some concessions in order to keep you as a paying customer in the future. Filing for Chapter 11 gives you the opportunity to restructure your debts and focus on making your business profitable in the future.
Another type of debt that has doomed many bakeries and restaurants in New York is tax debt. And unlike other types of debt, a bankruptcy cannot discharge your tax obligations. That means that while a bankruptcy filing can temporarily halt a tax lien against you, the debt will continue to follow you after your bankruptcy is discharged. This includes tax money owed to the IRS as well as the State of New York.
It’s understandable if this seems daunting. But just like with any other creditors, tax authorities will often agree to negotiate with you as well. If your back taxes are so overwhelming you have no path to pay them off while staying in business, the IRS may work with you. In some cases, the IRS or the State of New York will agree to a structured payment plan that allows you to pay your taxes back slowly while remaining in operation. Occasionally, a tax authority will even agree to forgive a portion of the taxes you owe.
But negotiating with the IRS is complicated. Without previous experience in negotiate this type of debt, you will likely have no frame of reference as to what is a good offer and what is a bad one. An experienced New York bankruptcy attorney can guide you through negotiating your tax debt during your bankruptcy case, and help you keep your business running at the same time.
Structured Settlements vs. Chapter 11 Bankruptcy
The bakery owner I was speaking with liked what he had heard so far, but he was still skeptical. He wondered aloud if it filing bankruptcy was necessary, and if there were downsides.
I told him that, like anything, there are downsides. A bankruptcy filing can make it difficult for your business to obtain a loan in the future. What’s more, it’s impossible to obtain contracts with some state agencies if you have filed bankruptcy previously. In cases where the negatives of filing for bankruptcy outweigh the positives, there is the possibility of a structure out-of-court settlement.
Out of court workouts are a great option if avoiding bankruptcy is a priority. In fact, I have negotiated many of these workouts myself. These are especially effective in cases where your business has a long running relationship with its creditors. Unfortunately, one unhappy creditor can throw a wrench in the entire restructuring plan. That’s why bankruptcy is such a powerful option; a creditor can’t merely ignore you as you attempt to restructure. The automatic stay provides important protections that can make your creditors come to the negotiating table.
After speaking with the baker, I was left the impression that our discussion had improved his outlook on the future of his company. Bankruptcy can be daunting, but for most people in his situation the possibility of keeping their business open is worth the risk. If you would like to discuss your options with the Bailyn Law Firm, contact my office immediately to set up your consultation.