Business Bankruptcy in New York

A struggling business has more options than its owners often realize. Bankruptcy and non-bankruptcy restructuring tools can salvage going-concern value, eliminate burdensome leases and contracts, restructure secured debt, and protect the owners' personal exposure on guarantees. We represent New York small and mid-sized businesses across the spectrum of restructuring work.

The Strategic Choice

Every business restructuring engagement begins with the same question: is there a business worth saving? If the answer is yes — the underlying operations are profitable, the cost structure can be rationalized, and the secured debt can be brought to fair value — then the goal is reorganization through Chapter 11 or Subchapter V. If the answer is no, the goal shifts to an orderly wind-down that maximizes recovery to creditors, protects the owners' personal balance sheets, and avoids fraudulent-transfer exposure.

Pre-bankruptcy alternatives to consider:

• Article 9 sale. A secured lender forecloses on substantially all assets and sells them to a new entity, often the owner's preferred buyer. Fast and cheap when the secured lender cooperates.
• Assignment for the benefit of creditors (ABC). A state-law alternative to Chapter 7 in which a fiduciary assignee marshals and distributes the business's assets to creditors.
• Out-of-court workout. Direct negotiation with lenders, landlords, and large vendors to restructure debt without a bankruptcy filing.
• Receivership. A New York state court receiver appointed to operate or wind down the business.

Reorganization Tools

If reorganization is the chosen path:

• Subchapter V Chapter 11. The right vehicle for most small businesses with debts under the Subchapter V cap.
• Traditional Chapter 11. Used when DIP financing, a 363 sale, or cramdown of large secured claims is required.
• Section 363 sale. A bankruptcy court-approved sale of the business as a going concern, free and clear of liens and successor liability.
• Lease and contract restructuring. Rejection of unprofitable leases under section 365, with rejection damages capped by statute. Cure and assumption of valuable contracts.

Liquidation Tools

If reorganization is not realistic:

• Chapter 7. An entity Chapter 7 transfers everything to a trustee and brings the operation to a definitive end. No discharge is needed because an entity does not need one.
• Chapter 11 plan of liquidation. Sometimes preferable to entity Chapter 7 when there is a structured sale process to run, executory contracts to assume and assign, or litigation claims to pursue post-confirmation.
• Wind-down without filing. An orderly closure that pays creditors in priority order, completes final tax filings, and dissolves the entity.

Protecting the Owners

Most small business owners have personally guaranteed at least some of the business's debt — the SBA loan, the landlord, the equipment lessor, and often unsecured trade lines. A business bankruptcy filing does not discharge personal guarantees. We coordinate the business restructuring with the owners' personal financial planning — sometimes including a follow-on personal Chapter 7 or Chapter 13 to deal with guarantee exposure.

Issues we address before the business files:

• Fraudulent-transfer exposure. Transfers to owners or insiders in the year (or longer) before filing must be analyzed carefully.
• Preferences. Payments to insiders within one year of filing, and to non-insiders within 90 days, are potentially recoverable by a trustee.
• Personal guarantees and pledges. Identification of every personal guarantee and the strategy for each.
• Trust fund taxes. Sales tax and payroll trust fund taxes are non-dischargeable personal liability for responsible persons. They must be addressed.
• Successor liability. Structuring an acquisition vehicle to avoid successor liability for the predecessor's debts and obligations.

Industries We Have Represented

• Restaurants and hospitality.
• Retail.
• Real estate holding companies.
• Professional service firms.
• Construction and contracting.
• Trucking and logistics.
• Manufacturing.
• E-commerce and online businesses.

Trust Fund Taxes and Personal Exposure

Sales tax collected from customers and payroll tax withheld from employees are "trust fund" taxes — the business holds them in trust for the taxing authority and never owns them. When a business fails without remitting trust fund taxes, the taxing authorities (the IRS for federal payroll withholding and FICA, the New York State Department of Taxation and Finance for state sales and withholding tax) can assess the unpaid amounts personally against any "responsible person" who willfully failed to remit them.

For closely held businesses, the responsible person is almost always the owner. Trust fund tax liability is non-dischargeable in personal bankruptcy under 11 U.S.C. § 523(a)(1) and survives any business bankruptcy filing. Addressing trust fund exposure before the business shuts its doors — through negotiated payment plans, voluntary disclosure, or carefully structured wind-downs — is one of the highest-value pieces of pre-bankruptcy planning we do.

Commercial Leases

Long-term commercial leases at above-market rents are one of the most common drivers of small-business bankruptcy filings in New York. The leverage Chapter 11 provides:

• Lease rejection. The debtor in possession can reject any unexpired lease under section 365(a). The landlord's claim for future rent is capped by section 502(b)(6) at the greater of one year's rent or 15 percent of the rent remaining on the lease (not to exceed three years).
• Assumption and assignment. A valuable below-market lease can be assumed by the debtor and assigned to a buyer in a section 363 sale, often producing significant value for the estate.
• Negotiated lease modifications. The threat of rejection often induces the landlord to negotiate a rent reduction outside of formal rejection — particularly in soft-market neighborhoods.

Assignments for the Benefit of Creditors Under NY Law

An assignment for the benefit of creditors (ABC) is a state-law liquidation alternative to bankruptcy, governed in New York by Article 2 of the Debtor and Creditor Law. The debtor transfers all of its assets to a third-party assignee, who liquidates them and distributes the proceeds to creditors in statutory priority order. Key features:

• No automatic stay (state-court litigation against the debtor can continue), but most creditors stand down voluntarily once they receive notice.
• The Supreme Court of the county where the business is located supervises the assignment.
• Substantially lower professional costs than a Chapter 7 in many cases.
• Better suited to businesses with relatively few creditors, no pending complex litigation, and no need for the section 363 sale machinery.

ABCs are not the right tool for every wind-down. Businesses with significant trade litigation, contested secured claims, or assets that need to be sold free and clear of liens under section 363(f) typically need a bankruptcy filing instead.

WARN Act and Employee Obligations

Businesses contemplating mass layoffs must consider both the federal Worker Adjustment and Retraining Notification Act (WARN) and the New York State WARN Act, which is broader than its federal counterpart in important respects. New York's WARN Act applies to employers with 50 or more full-time employees (versus 100 under federal law) and requires 90 days' advance written notice of a plant closing or mass layoff (versus 60 days federal).

Failure to give the required notice exposes the employer to back pay and benefits for each day notice was not given. Pre-bankruptcy WARN planning is critical for any business of meaningful size that is preparing to file Chapter 7 or to use a Chapter 11 to wind down. The "unforeseeable business circumstances" and "faltering company" exceptions narrow the notice obligation in some scenarios but do not eliminate it.

Common Triggering Events

The right time to engage restructuring counsel is before the situation becomes a crisis. The events that most often prompt the call to our office:

• A bank notice of default, acceleration, or commencement of a sweep on operating accounts.
• A landlord's three-day or thirty-day notice of default or commencement of a commercial holdover proceeding.
• A judgment of meaningful size entered against the business or a key principal.
• A merchant cash advance (MCA) funder filing or threatening to file a confession of judgment.
• An IRS or NYS DTF tax lien notice or revenue officer contact.
• A key supplier or customer refusing to extend further credit.

To discuss your business's situation in confidence, call 212-233-1233. Early engagement — ideally before a default is declared, a judgment is entered, or a foreclosure sale is scheduled — gives us the most options.