Bankruptcy Happens – How to Deal with It! - Webinar

This blog comes from a webinar that was presented by SunRay Construction Solutions and conducted by bankruptcy attorney Jordan L. Rappaport of Rappaport Osborne & Rappaport, PLLC. He has been practicing bankruptcy for over 24 years. In this blog we will discuss various issues involving construction lien and how you get caught up in bankruptcy.‍

Bankruptcy and How You Got Here

You may be wondering how you got here. Well, first, we will talk about your business. A lot of general contractors hire subcontractors and if one of your subcontractors files a bankruptcy, you are involved whether you like it or not.

1. When a subcontractor files bankruptcy

a. Were they given a deposit?

If a deposit was given, that deposit may be part of a bankruptcy estate. So, before using and accessing a deposit, you may want to consider the ramifications with bankruptcy.

b. Are they in possession of materials?

Have you supplied building materials or have you paid for building materials and given them to a subcontractor? Did the subcontractor then use them and file bankruptcy? You will need to determine whether or not money is owed to or from the subcontractor and how it affects you with the bankruptcy, because you may be a creditor in the bankruptcy.

c. Do you owe them money?

Even more importantly is if you owe them money, they may file bankruptcy.  

d. Be careful whom you pay

If you pay them instead of paying a bankruptcy trustee (a court-appointed official who oversees a business once it is closed down in bankruptcy), you may find yourself in a very difficult position.

So, these are things that you have to ask yourself. If you do not know the answer, seek counsel, because you do not want to end up paying the wrong person and having to pay twice.

2. When a property owner files bankruptcy

Another scenario is when the property owner files bankruptcy. There are many people who file themselves in financial difficulty, fall behind in a mortgage, and file a bankruptcy via the Chapter 713. But if you have done work on a property and are owed money, you need to assess where you are and figure out what your next step is.  

a. Did you file a lien?

If you have not yet filed a lien before the bankruptcy is filed, you cannot file it after. This is called an “automatic stay,” but suffice to say that once the bankruptcy is filed, it is too late to file a lien.

So, using SunRay to file a lien as soon as you are legally able to and following up on proper lien recording is extremely important because it will put you in a better position.

b. Are you holding a deposit?

Another issue is if you are holding a deposit, are you able to access that deposit once the bankruptcy is filed? There is no black and white answer; it depends upon the type of bankruptcy. But think of it this way – if you find out that the owner of the property you are working on filed bankruptcy, whether it is a single-family home, a commercial piece of property, or a large multi-unit hotel of some sort, you need to be aware that you will not be able to touch those deposits until you deal with the bankruptcy issues.

3. When a contractor files bankruptcy (you are a subcontractor)

Lastly, if you are a subcontractor and the contractor you are working for files bankruptcy, it is essentially the same analysis.  

a. Did you file your lien?

You need to have filed your lien. And even though the general contractor files bankruptcy, if the property owner has not filed bankruptcy, are you able to file a lien? In some cases, you can, but in some cases you cannot.

You have to look at the specific aspects of the bankruptcy, but these are questions that should pop into your head once you find out that the contractor you are working for has filed bankruptcy.  

b. Do you continue work?

Even more important is, do you continue working? Is the general contractor reorganizing, continuing to work and expecting you to continue to work? Or have they closed up shop and are you wondering whether you should work?

Well, these are things that will change according to the situation. But you need to analyze this, and you may need to contact an attorney to analyze this and give you answers to those questions.

Types of Bankruptcy

There are different types of bankruptcy. Each type has specific pros and cons for you as a potential lien holder. The one you will probably most come into contact with is in Chapter 11.

1. Chapter 11 – Usually businesses attempting to reorganize

Large real estate developers file for bankruptcy in South Florida and even general contractors do. Chapter 11s are the common theme. If a business wants to try to reorganize or continue to operate, even if they are heavily in debt and there are some cash flow issues, they will file what is called a “Chapter 11.”  

A Chapter 11 is a reorganization which means that there is no trustee appointed to close up the business. It continues to operate but under the close supervision of the US Trustee’s Office. Everything is done out in the open and under a microscope.

In the Chapter 11, there are a lot of moving parts. There could be cash collateral issues, 20 different types of secured creditors, insurance companies, or bond issues. If you find yourself listed as a creditor and owed substantial sums or have substantial sums online.  

a. Requires immediate attention

In a Chapter 11 bankruptcy, you need to be careful and immediately assess where you are and determine whether you need an attorney. There may be very important work that you will need to keep doing and you want to be paid. You may get phone calls from the people in bankruptcy saying why did you stop working.

You need to address that and if they want you to keep working while they are in Chapter 11, certain safeguards need to be put into place so that you get paid. The last thing you wish to do, is to keep working knowing that you are not going to get paid.

b. Be careful of lien stripping

You also need to be careful of liens being stripped. This means that even you properly file a lien on a project that you are working on, there are procedures within Chapter 11 cases wherein a debtor possession - which is the entity that is in the bankruptcy – can seek to sell property out from underneath your lien and then determine the priority and extent of the liens.

This is done in very large cases and it is a very powerful function of a Chapter 11 proceeding. You need to be aware of whether they are trying to do this or whether they are going to try to do this. Then you need to enforce your rights.

Filing the lien is the right decision but understand that that does not mean it is a brick wall. In a Chapter 11 proceeding, a clever debtor can knock down that wall. You need to be aware of it and protect yourself.

2. Chapter 7 – Liquidation

The next type of bankruptcy is a Chapter 7. Chapter 7s are a little simpler than the 11s in that the business is shut down whether it is an ongoing real estate project or a contractor. In a Chapter 7 proceeding, you will no longer be dealing with the entity that filed bankruptcy. A trustee is appointed, and a trustee in the Chapter 7 essentially takes control of the business debt that has filed the bankruptcy.

a. It is urgent, but not an emergency

So, whether you are owed money or there is work to be done, you will be dealing with a whole new set of people. In this case, a Chapter 7 trustee. If you find out that you are a creditor or listed in a Chapter 7 bankruptcy, it is not as big of an emergency as a Chapter 11 because it is not ongoing. But you still need to give it your direct and immediate attention.

b. They can be either personal or business

If there is somebody who owes you money, even an employee, who files a personal bankruptcy, you also need to pay attention to what is going on and potentially follow with a Proof of Claim to get paid. But it does not have the same urgency as a Chapter 11.

3. Chapter 13

Last but not least is a Chapter 13. Most vendors, suppliers, general contractors, and sub-subcontractors will not really get affected by a Chapter 13 except for in one particular instance.

Always personal

A Chapter 13 is always an individual or a person. And in some instances, when that person files bankruptcy, will seek to strip off liens from the house. So, there may be situations in which the property owner notices when they do a title search on a property of theirs if there is a lien from, let us say, an air conditioning company, or somebody that installed a sub-pump.

It could be for a few thousand dollars but if you did work on a house and you have a lien, you want to get paid the few thousand dollars and that is why you filed the lien. Well, in a Chapter 13, if the value of the property is below what is owned in the first mortgage and your lien, or whatever amount is essentially unsecured, they can move to strip it off because of the Florida homestead provisions.

That is easy to see by the plan they filed. They actually file a piece of paper in the bankruptcy, called the Chapter 13 plan, which will show in black and white that they are trying to deprive you of your lien and your rights, to remove that lien.

There are ways to object to this. If you do not pay attention to it, your lien will be gone, and you will get pennies and a dollar. If you encounter that somebody has tried to do this to you, you need to contact an attorney immediately to protect your rights.

The Automatic Stay

Now let us talk about something that is pretty black and white but can get very complicated very fast. That is the Automatic Stay. Section 362 is called the Automatic Stay in bankruptcy, and this is the most powerful function of bankruptcy, and this is the reason why companies and individuals file bankruptcy.

Upon the filing of the bankruptcy, everything gets stopped in its place. A federal court injunction called the Automatic Stay comes into effect immediately down to the minute of filing. What this injunction does is it stops all collection efforts in their tracks.

So if you are trying to collect money from someone or you are trying to file a lien, but you have not filed yet, and you find out that the property you are trying to file a lien against has filed a bankruptcy, you are stuck. You cannot rush out then and say that you want to do it. That Automatic Stay is instantaneous.

Even better, let us assume that you filed a lien today, and you find out a few days from now that the property owner or the construction company filed bankruptcy a couple of days ago. It may have taken you a few days to find out or something might have come in the mail. That lien you filed after the bankruptcy, even if you didn’t receive notice of it, is invalid. You are going to have to remove that or it will be void.

a. It is automatic

So when we say that the Automatic Stay is automatic, it happens instantaneously. If you ignore this and say that you did not open your mouth for a couple days and are going to try to collect, you cannot ignore this.  

b. Severe penalties if you ignore

And if you try to collect money from people in bankruptcy in spite of the Automatic Stay, you can be subject to severe sanctions.

c. Take no collection action

Bankruptcy judges do not play; they are very aggressive, and attorneys are also very aggressive if someone is trying to collect against someone that they put in bankruptcy.

d. Be careful with all communications

If you are going to email someone or a company doing business with bankruptcy, you are allowed to communicate with them, but it cannot be communication to collect money. You can ask what is going on and who their attorney is, and get basic information, but you better not mention anything about money that is owed to you or try to collect it. Or you will find yourself in a jam.

e. Court permission required to take certain actions

There are ways to go around the Automatic Stay and seek relief from it to do certain things. So, if you are trying to remove some of your materials from a project site that is in bankruptcy, you may need to seek relief to do that. You may not be able to just go in and take your materials back if the debtor claimed an interest in them.

It is extremely important that if you are owed money, or you have materials you are trying to get back, that you pay attention to this. To not address the Automatic Stay, is to potentially suffer severe consequences.

How Do I Get Paid?

So, this is the main question – how do you get paid? Well first and foremost, whenever there is a bankruptcy filed, in order to ever get paid from the bankruptcy, there are some things you need to do first.

a. File a Proof of Claim

First, you need to file a Proof of Claim. Filing a Proof of Claim is a fairly straightforward procedure. It is simply filling up a form, stating how much you are owed, what basis you are owed, and filing it with a court.

There are ways for you to do that yourself, or you can hire an attorney to do it for you. Yet, it is important to understand that the claim form has certain boxes that the market was either secured unsecured priority.

So for instance, what if you are an employee of a general contractor, not like a sub, but if you are actually employed by a company to file bankruptcy and they did not pay your last week’s wages, well you should not only file a Proof of Claim, but if you are an employee, you are entitled to a priority claim which means that you are going to get paid before other people. So, you need to be careful to fill this out and also review it very carefully. Make sure you check the right boxes.

b. Deadline to file

It is also important to understand that there is a deadline to file a Proof of Claim. You cannot file it whenever you want, you should look at the deadline and there are ways to find it. You can check on the bankruptcy website or check with an attorney. In fact, you may receive a deadline for the notice in the mail.

You cannot miss the deadline. If you do and even if all claims get paid, let us say, at 80 cents a dollar, and you claim is late, you are not getting anything.

c. Do not work for free

You have worked hard to get the money, you have done your work, and you need to get paid. Do not work for free, you should file a Proof of Claim.

In a Chapter 11, sometimes there is ongoing work. For example, if you are a company that provides janitorial services, you are a company that hauls away dirt, materials, or brick. It is ongoing and you have a weekly run with the general contractor.

d. Chapter 11 – Ongoing work

Well if a Chapter 11 is filed, they may want you to continue to do that. But you need to make sure that you are paid concurrently with your work. This is called an executive contract. You need to be aware of this and of the fact that there are ways to get paid in a Chapter 11 post-filing.

But you also need to make sure that you and the company that file bankruptcy are on the same page.

e. Make sure your lien is filed or bond claims are sent

Most importantly, make sure that your lien is filed, or your bond claims are sent. You need to do that, and SunRay Construction Solutions offers this service. This is a very simple procedure that needs to be done. Protect yourself, file your liens as soon as you are legally able to. By doing so, you will put yourself in a better position. When you are a secured creditor, it is much better than being an unsecured creditor.

Executive Contracts and Assumption by a Debtor in Possession

Here is where it gets a little wonky. If you have a contract with a company in bankruptcy that exists prior to filing bankruptcy, they may want you to continue with that. This is called an “assumption” in a Chapter 11 proceeding.

If not assumed, it is rejected

If a debtor in bankruptcy is going to assume your contract, that means that they are actually allowed to pay you. In bankruptcy, the purpose is not paying all debts, but what if you have an ongoing debt? You are paid weekly, so assuming that on the day of filing you are owed a minimum amount of money, but you want to continue doing work, you want to make sure that you get paid.

Well there is an agreement that you can enter into. It is called an assumption of contract or an assumption of lease. In the bankruptcy proceeding wherein, even though they are in bankruptcy, you can continue to get paid as if nothing has changed. And that is what an assumption of an executive contract is. You should not assume that it is business as usual. You need to address this immediately.

For example, you are a business that helps clean various construction sites, you are paid on a weekly basis. You go to an attorney after the Chapter 11 is filed and ask if you can keep doing this and getting paid because you do not want to keep working and not get paid. The attorney is retained, they contact the debtor’s attorney, and they tell the attorney that they need your services and that you are a vital part of their business.

So you enter an agreement to assume the contract, file it with the court, and it is blessed by the court. The judge smacks the gavel and says okay, and you continue to do business.

So in the above instance bankruptcy did not affect you because it was dealt with immediately and the contract was assumed.

Bankruptcy – Can it Help My Business?

Now we will just talk about bankruptcy in general. Bankruptcies often get a bad rap. People consider bankruptcy as a business that has failed. But this is not exactly the case. What happens is, a bankruptcy, especially a reorganization can be used to stop various things such as foreclosures, lawsuits, garnishments, and creditor collection efforts.

What happens is, your business may be making money, but some of your creditors may be soaking up more than what is coming in. So, bankruptcy can give you breathing room until you can maybe ramp up your business and make

1. Bankruptcy does not mean “shut down”

The goal of bankruptcy is to create a fresh start. Attorneys work to reorganize numerous businesses and they all emerge stronger. That is the goal of bankruptcy.

2. Borrowing money from factoring companies

Small businesses borrow money from factoring companies wherein the factoring companies get a hold of their credit card receipts before they do.

3. Sell assets through §363 sale without liens

Lastly, if you have valuable assets in your company, and maybe wish to shut it down but you do not know what to do with the valuable assets, you cannot just sell them and put the money in your pocket. There is a procedure so that you can shut down a business and not be accused of fraud. You can sell those assets in bankruptcy through a §363 sale.

There are a lot of opportunities and if you own or run a company that is facing financial difficulties you should call attorneys like Jordan L. Rappaport or call somebody who understand this process like another bankruptcy attorney. Get information because there is no downside in obtaining that information so that you can make informed decisions and go over options.

Personal Liability

Bankruptcy attorneys represent a lot of individuals who own companies and a lot of times they are required to give a personal guaranty. It does not happen all the time, but it does happen quite often. So what happens is, if you have a large number of personal guarantees, and maybe you get stuck on a lease or a business shuts down.

Next thing you know, a landlord is suing you for $500,000, but you do not have that. Sometimes it is best to explore options.

Florida has a tremendous number of exemptions and it may be that you can file bankruptcy and get rid of all your debts personally and not lose anything. We can discuss this once again; it is important to speak with an attorney to go over options. Just because you file bankruptcy does not mean you will lose anything.

For example, Mr. Rappaport has put a tremendous number of people into what is called Chapter 13. They kept every single one of their assets and saved hundreds of thousands of dollars. Every situation is unique.

How does it affect my credit?

The last thing is that there is a big misconception on credit. People think that if they file bankruptcy, that they are going to have no credit for 7 years. Nothing is farther from the truth. Your credit does not get turned off for 7 years. Yes, bankruptcy is a negative mathematical factor on your credit, but within one year of filing bankruptcy, your credit score can go up tremendously.

In conclusion, if you do have or need to file a lien, you need to do it as soon as possible. You can contact us at SunRay and take advantage of our easy-to-use application.