The Complete Bankruptcy Guide for Restaurants

August 18, 2020

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

For many chefs, foodies, and entrepreneurs, opening a restaurant is a dream come true. But the unfortunate truth is that many restaurants fail, and with the ongoing effects of coronavirus, the number of restaurants that will close in 2020 will be staggering. According to one estimate, as many as 85% of independently owned restaurants could permanently close if there is no government intervention.

With so many restaurants exposed to an uncertain future, it poses the question: What can restaurant owners do if they find themselves underwater?

If you can’t pay your bills, you have a few options:

  • Reduce your expenses (which often means laying off staff).

  • Borrow money to pay your debts (which is almost always a bad idea).
  • File for bankruptcy (which can allow you to keep your business open, depending on your circumstances).

In this article, we will walk through the types of bankruptcies for restaurants. We hope this helps you determine the best course of action for your struggling business. Of course, every circumstance is different. If you are considering one of these options, speak with a licensed and experienced bankruptcy attorney in your state.


Types of Bankruptcy for Restaurants

There are three main bankruptcy options for restaurants:

  • Chapter 7

  • Chapter 11

  • Chapter 13

The option that makes the most sense for your unique circumstances depends on a variety of factors, including your end goals and financial situation. Let’s walk through each option.

Chapter 7 Bankruptcy for Restaurants

Chapter 7 is the most basic form of bankruptcy. In a Chapter 7 Bankruptcy, the restaurant ceases all business operations and closes its doors. After that, the business sells off all of its non-exempt assets and attempts to pay off all creditors. In this scenario and all other bankruptcy scenarios, a judge will decide which creditor gets paid off first.

The entire process usually takes restaurants around six months. After completion, the business will be absolved of its debts and can start from scratch.

Chapter 11 for Restaurants

Chapter 11 is a more complex option. In a Chapter 11 bankruptcy, a company reorganizes its debt and stays in business. To continue restaurant operations, the company and the creditors must agree on a detailed plan of how the restaurant is going to repay their debts.

Until recently, Chapter 11 was not very common for small business owners because it was generally costly. But thanks to the Small Business Reorganization Act of 2019, Chapter 11 bankruptcy protection is now available to a broader range of businesses. Because this protection is so new, we recommend talking to an experienced attorney to determine whether Chapter 11 bankruptcy protection is a viable option for your small business.

Chapter 13 Bankruptcy

Chapter 13 is similar to Chapter 11, except it is only available to individuals and sole proprietors. It is not available to LLCs, corporations, or partnerships. Because of these restrictions, Chapter 13 is usually not available for restaurant owners.

What Happens After a Restaurant Files for Bankruptcy?

After you file for bankruptcy, the work is just beginning. Filing is just the first step in a long and arduous journey towards financial freedom. This is not a journey you want to take alone. A skilled attorney will help you get all of your paperwork to help fight for the best possible outcome.

In Colorado (and most other states), the process starts with basic paperwork and a filing fee. As you would probably expect, the amount of paperwork for a Chapter 7 bankruptcy is much less than a Chapter 11. The majority of the paperwork will be financial disclosures. This is when you will turn over all of the information about your current financial situation, including bank records and notices of all outstanding debt.

After the initial paperwork and disclosures, your attorney will draft reorganization and payment plans (if filing Chapter 11 or 13) and hand them over to the court. At the most basic level, this plan will include how much the debtor will pay back to the creditors. It will also specify which creditors get paid back first and how long the entire repayment process will take.

For Chapter 11 and 13 bankruptcies, one must draw up reorganization and payment plans and share them with the bankruptcy court. These plans must include how much each creditor will be paid and how long it will take to pay them. 

Next up is the confirmation hearing; this is where your attorney will discuss the submitted plans with the court. If your lucky, the proposal will be accepted and you will move forward under the agreed-upon terms. But it is very common for initial terms to be rejected. If this happens, be prepared for lengthy negotiations. Having a skilled attorney by your side will ensure you have a knowledgable person fighting for your best interest.

After all of the parties come to an agreement, it is up to the restaurant to stick to those agreements. As a debtor, you will most likely be required to provide updates to the court with your progress.

If you fail to meet the obligations of your repayment agreement, you will be forced to file for Chapter 7 and liquidate your non-exempt assets in order to pay back your creditors.


Pros and Cons of Bankruptcy for Restaurants

Like all significant business decisions, filing for bankruptcy comes with its pros and cons. One thing we want to make clear: filing for bankruptcy does not mean the end of your career. There is no shame in filing for bankruptcy; it is merely a financial tool that allows you to start fresh.

Here’s a quick list of the advantages of disadvantages so you understand what you could be getting yourself into:

Pros:

  • Filing for bankruptcy triggers an automatic stay. This means that creditors must cease collection efforts and give you a chance to get organized.

  • If successful, your restaurant will be absolved of all debts. This is obviously the central point for pursuing bankruptcy.
  • You could keep your restaurant open. If you choose Chapter 11 and stick to your repayment agreements, you may be able to continue to operate your business.

Cons:

  • You may have to liquidate your assets. Depending on your situation, you may have to sell your kitchen equipment, building, and other assets.
  • It will affect your credit score. This can make it difficult to get future business loans.
  • Negotiations can be costly. Chapter 11 repayment negotiations can take a long time. The longer it takes, the more it will cost.

How Much Does it Cost to File Bankruptcy?

If you are filing a straightforward Chapter 7 bankruptcy, the overall cost can be surprisingly low. In a simple Chapter 7, you have to pay filing fees and attorney fees. We would suggest seeking an attorney who can provide an upfront price so that you aren’t surprised by the total amount.

The cost of filing Chapter 11 or 13 is much more complicated as there are countless variables. In addition to filing fees, you will also have to pay attorney’s fees and usually accountant’s fees. The longer your case goes on, the more you will have to pay. This is one of the many reasons why hiring a professional is worth it. A good attorney will charge a premium, but they will often make up for it with their negotiation skills and prior experience.


Should You File For Bankruptcy?

The choice to file bankruptcy for your business is very personal that should not be taken lightly. Ultimately, it comes down to your unique circumstances and goals.

If you believe your restaurant could start turning a profit and repaying your debts without filing for bankruptcy, that is a great solution. If your restaurant could start turning a profit, but your current debts are unmanageable, then you may want to consider Chapter 11. If you don’t see any way forward for your business, then Chapter 7 might be a good solution.

Remember, there is no shame in filing for bankruptcy, and it does not mean the end of your career as a restauranteur. More than anything, bankruptcy is a financial tool that provides relief for individuals and businesses in difficult situations.

If you are considering bankruptcy for your business, feel free to contact us and we can discuss your situation.

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