Bankruptcy, Restructuring & Financial Workouts
Financially distressed restaurants and hotels have more options than most operators realize. I guide hospitality businesses through out-of-court workouts, Subchapter V small business restructuring, and full Chapter 11 reorganizations — with particular focus on the tools that are distinctive to hospitality: lease rejection and assumption strategy, the bar date mechanism that creates permanent finality on wage and hour exposure, EIDL and SBA loan resolution, and personal guarantee exposure. The decisions made in the months before a filing typically determine the outcome more than anything done afterward.
How does Chapter 11 bankruptcy help a financially distressed restaurant?
Chapter 11 provides tools unavailable in out-of-court negotiations: an automatic stay that immediately halts all collections, evictions, lawsuits, and enforcement actions upon filing; the ability to assume (keep) or reject (exit) commercial leases on the restaurant’s terms rather than the landlord’s; a bar date mechanism that creates permanent finality on wage and hour claims; a reorganization plan that can discharge unsecured debt and restructure remaining obligations; and, in some cases, the ability to restructure secured debt over creditor objection.
For restaurants, the lease assumption and rejection decision is often the most significant tool. A restaurant losing money at one or two locations but profitable at others can use Chapter 11 to exit the unprofitable leases — paying a capped rejection damages claim rather than the full remaining obligation. Out-of-court negotiations put all the leverage on the landlord’s side; Chapter 11 shifts it.
What is Subchapter V bankruptcy, and is it available to restaurants?
Subchapter V is a streamlined Chapter 11 track for small businesses, enacted in 2019 to make reorganization faster, less expensive, and more accessible. Key advantages: a trustee is appointed to facilitate a plan but doesn’t take over management; the debtor doesn’t need creditor approval to confirm a plan as long as it provides for disposable income to creditors over three to five years; the process moves faster than traditional Chapter 11; and administrative costs are lower.
To qualify, the debtor must have no more than approximately $7.5 million in total noncontingent liquidated secured and unsecured debt. Many independent restaurants and small multi-unit groups fall within this limit, making Subchapter V the preferred restructuring vehicle. For restaurants with debt above the limit, traditional Chapter 11 is available. An attorney experienced in both tracks is essential for making the right choice.
How does Chapter 11 affect a restaurant’s wage and hour claims?
Chapter 11 is one of the most powerful tools available for achieving finality on wage and hour exposure — a finality no out-of-court settlement can replicate. When a Chapter 11 case is filed, the court sets a claims bar date. Any employee with a wage claim — including former employees who might otherwise file claims for years — must file a proof of claim by that deadline or be permanently barred. This creates a known universe of wage and hour liability that can be addressed through the reorganization plan.
By contrast, settling with one group of plaintiffs in an FLSA collective action today doesn’t bar future claims from other employees not party to the settlement. A restaurant with significant historical wage and hour exposure from a large workforce can use the Chapter 11 bar date to cut off that recurrence risk entirely — which, for some clients, is one of the most compelling reasons to consider a structured process independent of debt levels.
What should a restaurant do in the 90 days before considering bankruptcy?
The 90 days before a bankruptcy filing are legally significant because payments made during this period to non-insider creditors can be ‘avoided’ (clawed back) as preferential transfers. Payments to insiders in the preceding year face the same scrutiny. In the 90 days before a potential filing, a distressed restaurant should: engage bankruptcy counsel to evaluate options and establish privilege; avoid making large payments to insiders; avoid transferring assets out of the business; document all business decisions carefully; open discussions with major creditors to assess out-of-court options; and preserve cash and operational capability. Pre-bankruptcy planning done correctly maximizes optionality. Pre-bankruptcy action done incorrectly forecloses options and creates personal liability.
How should restaurant ownership be split between an operator and an investor?
There is no single right answer — the correct structure depends on the relative contributions of each party, the risk each is taking, the expected return, and negotiating leverage. Common structures combine: a base equity split reflecting capital contributions; a preferred return for the investor (a priority distribution until the investor recovers a specified return); a promote or carry for the operator (an additional economic share above base equity, triggered after the investor achieves their return); and management fees to the operating entity for ongoing management.
The critical legal work is not picking a percentage — it is drafting governing documents that implement the agreed economics precisely, anticipate edge cases (what if more capital is needed? what if the investor wants out early? what if the operator wants to expand?), and align incentives over the long arc of the investment. Deals that are economically agreed but legally imprecise generate expensive disputes when circumstances change.
What is an SBA loan, and how does it work for a restaurant?
The SBA does not lend money directly — it guarantees loans made by participating banks and non-bank lenders, which reduces lender risk and allows restaurants to access financing that might not otherwise be available. The most commonly used programs are the SBA 7(a) loan (up to $5 million, for working capital, equipment, furniture, leasehold improvements, and sometimes real estate) and the SBA 504 loan (for major fixed assets). SBA loans typically require personal guarantees from all owners with 20% or more ownership, and carry specific restrictions on use of proceeds. The EIDL program, which was widely used during COVID-19, has its own repayment and restructuring considerations that continue to be relevant for operators who borrowed under it.