Facing almost $1 million in debt with just $15,000 in assets, Las Vegas contractor TH Flex Systems, Inc. recently filed Chapter 7 bankruptcy.
TH Flex’s debt appears to be entirely unsecured — if the debt is discharged in the bankruptcy proceedings, at least thirteen contractors may simply be out of luck when it comes to getting paid.
The firm’s bankruptcy highlights the pitfalls of the construction industry and reaffirms the importance for creditors to secure their debt.
Creditors’ path to payment is unclear
According to their bankruptcy filing, TH Flex owes approximately $958,000, including several six-figure amounts to various HVAC suppliers. Multiple creditors are currently pursuing legal action against TH Flex over non-payment.
The largest of TH Flex’s creditors are as follows:
- $253,000 to Geary Pacific
- $217,000 to Winsupply Las Vegas NV Co
- $197,000 to Goodman Distribution
- $190,000 to Step-Toe Industrial Park
The creditors’ only hope for payment may come from the $15,000 in assets listed in TH Flex’s bankruptcy filings. If eligible for liquidation, the meager amount will likely be distributed to creditors — but who gets what isn’t exactly clear.
“Eligible assets will be liquidated and then distributed to creditors,” confirmed Matt Viator, senior Legal Associate at Levelset. “The creditors’ priority will determine who gets paid first, and how much they receive. Priority can be complex, but generally, secured debts are paid before unsecured debts.”
Unfortunately for creditors in this situation, there doesn’t appear to be any secured debt or priority hierarchy. Bankruptcy filings list all creditors in the same “nonpriority unsecured claim” section.
Since TH Flex’s assets aren’t enough to cover their debts, “creditors within the same priority class will generally receive pro-rata distributions,” said Viator.
It’s difficult to see how TH Flex’s creditors can expect to recoup their losses here. “If liquidated assets run out before a lower priority class is paid, then those creditors may end up receiving nothing,” Viator continued. “Ultimately, after all the assets are liquidated and distributed, most debts will be discharged.”
Cash flow problems in the construction industry are well-documented — Levelset’s 2021 Construction Cash Flow & Payment Report found that just 9% of construction professionals always get paid on time and 97% experience stress from slow payments and cash flow problems.
TH Flex’s bankruptcy puts significant pressure on the balance sheet of its many creditors and partners who are owed money for time, materials, and labor. Writing off a six-figure expenditure is certainly a tough pill to swallow for any contractor. Adding tension to an already precarious financial situation increases the risk of a domino-like effect of failure down the payment chain.
For contractors, a mechanics lien can prove to be an incredibly powerful tool in situations like this. Mechanics liens, which are for the most part bankruptcy-proof, allow contractors to secure their debt and protect their right to payment.
Mechanics liens operate by placing a right against the property, and will persist even after debt is discharged through a bankruptcy. While not necessarily 100% guaranteed, using a mechanics lien to secure debt greatly increases the chances of a contractor getting paid, even in the event of a bankruptcy.
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