2 August 2013
Quick Answer: A lot.
The filing fee is $1,046.00, administrative costs will likely be
thousands, and one can expect to pay five figure amounts in attorneys’
fees. Further, there are costs that can
be unexpected that make a precise estimate impossible, one which is discussed
below, but first, a brief introduction.
Frequently small business owners face temporary setbacks
where they believe a reorganization may be a good move. However, in the long run, many of these
businesses either find a way to carry on or simply go out of business. One reason is the complexity, costs, and
obligations that come with a chapter 11 reorganization.
One obligation of the debtor in a chapter 11 will exemplify
this point. It is the concept of an
entity, often a creditor, to be entitled to its expenses (from the bankruptcy
estate – yes that is you small business) for its “substantial contribution” to
the case. Although the definition of and
what constitutes a “substantial contribution” is subject to differing interpretations, the basic
gist is that if an entity can show that it incurred expenses in order to
benefit the case that it did not incur to serve its own interests and there
indeed was a demonstrated benefit to the case, then the entity is entitled to
its reasonable expenses. The specific statute
permitting this is 11 U.S.C. 503(b)(3)(D) which reads:
Allowance of administrative expenses
. . . .
(b) After notice and a hearing, there shall be allowed administrative expenses . . . including –
(b) After notice and a hearing, there shall be allowed administrative expenses . . . including –
. . . .
(3) the actual, necessary expenses, . . . incurred by –
. . . .
(D) a creditor, an indenture trustee, an equity
security holder, or a committee representing creditors or equity security
holders other than a committee appointed under section 1102 of this title, in
making a substantial contribution in a case under chapter 9 or 11 of this
title;
As you can see, these administrative expenses are only
permitted after “notice and hearing,” which means the bankruptcy court must
approve them. However, even though there
is some protection in the fact that the bankruptcy court must approve these
expenses, the concept of having to pay another entity’s expenses, even if they
were incurred presumably to benefit the case, can be difficult for a small
business to accept, especially one that is experiencing financial
difficulty. Thus, a small business
should not rely on the prospect of reorganization for its business turnaround until
it realizes all that is involved in taking this path.
In the event that you own or run a small business and are
seeking input on whether the bankruptcy code can provide the help you need,
feel free to give us a call.
