How Bankruptcy in Construction Impacts All Parties, Part 1 - August 2022

Fri, Aug 19, 2022 at 8:00AM

Trent Cotney, Partner, Adams and Reese, LLP

As you know, every construction project relies on multiple parties to complete the project. Owners are under contract with general contractors and general contractors have agreements with subcontractors and other trades. When any of these parties file for bankruptcy, that action can affect everyone. This article will explain the basics of bankruptcy and the parties involved. Part 2 will describe the various ways you can protect yourself when other parties face bankruptcy.

The Basics of Bankruptcy

Construction can be a risky and volatile business. You never know when an owner or a contractor will suddenly shutter its doors and disappear from the worksite. Another all-too-common occurrence is one of the parties having to file for bankruptcy. This action usually occurs when the company is losing money and cannot sustain itself.

The details of bankruptcy are managed by federal law. The law’s intent is to ensure all creditors are treated equally. Although there are many kinds of bankruptcy, there are a few common ones for owners and contractors:

Chapter 11: With this type of bankruptcy, the debtor seeks reorganization so it can stabilize its financials and become viable again.
Chapter 11, Subchapter 5: Subchapter 5 of Chapter 11 was enacted in 2019 and is designed for small businesses. There are many favorable provisions for businesses with less than approximately $2.7 million in debt that may allow them to restructure debt.
Chapter 7: With this type of bankruptcy, the debtor seeks to liquidate its assets and pay its creditors.

It may seem counterintuitive, but creditors often see better results when a debtor is in Chapter 11 because the debtor wants to stay in business and maintain a good relationship with its creditors.
However, in many cases, debtors are unable to restore their stability and Chapter 11 bankruptcies devolve into Chapter 7. Read more.

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