If the company can’t pay its bills, it may want to change its financial structure or sell its assets. The most efficient way to do that might be bankruptcy. But bankruptcy can be costly. A Chapter 11 sale may not be fast enough. Sometimes another route reaches substantially the same result in less time or for less money. And your creditors may prefer that you not file at all. They may want to use their own remedies outside of bankruptcy court. A small business debt situation need not necessarily be a story of inevitable bankruptcy. There are alternatives out there that can work if you can identify them. At Delancey Street we negotiate with business creditors on behalf of owners, and these are the seven alternatives we think you should understand before you file.
UCC Foreclosure Sale
The first is a UCC foreclosure sale. When you borrow against your business’s personal property, you are typically giving the lender a security interest in the collateral. Under the Uniform Commercial Code, lenders can foreclose on personal property without going to court, as long as they don’t ”breach the peace.” The lender sends a notice to you saying you are in default. The lender will also send this notice to the other secured creditors and the guarantors. Next the lender will sell the assets. The sale proceeds get applied to your loan. The assets have to be sold in a commercially reasonable way. If they aren’t, the lender may be liable to you and may lose the right to collect the remaining balance or pursue guarantors. It is generally cheaper than going into bankruptcy, and usually less time consuming. The required notice can often be as little as 10 days. UCC collateral can only be personal property; if real estate is involved, a separate proceeding (usually a lawsuit) is typically required, and only secured creditors can use a UCC foreclosure. You can generally derail the process at any point before the final sale by filing bankruptcy, and because there is almost never a court order approving the sale, collecting what is still owed from you and your guarantors may take substantial litigation.
The second alternative is a quieter version of the first. Here’s the difference between a sale of collateral and this other thing. Basically, if you agree or don’t object when asked, the lender can take the collateral and not sell it - and apply it in full or partial satisfaction of the debt.
The third is an assignment for the benefit of creditors, or ABC. It works like this: the company’s assets are transferred to an individual (the assignee), who functions like a trustee. The assignee sells the company’s assets and distributes the proceeds to creditors. The business gets no discharge of debts, so creditors may still sue the business. By the time they get a judgment, however, they will find the assets have already been sold, and the judgment may be worthless. There may be a detailed state statute governing ABCs, or the assignee’s responsibilities may simply be defined by common law. Secured claims still come first. If the business is over-encumbered with liens, there may be nothing left for unsecured creditors. Without some orderly process, creditors may race to the courthouse, each trying to be first to sue and get paid. An ABC slows down the scramble and treats creditors of the same class about equally. Another reason is that it is often quicker and cheaper than a bankruptcy, at least under the right circumstances. The catch is that the ABC is a tool to wind a company down. You usually can’t use it to restructure and keep the business alive.
The fourth alternative, a receivership, is one that can be imposed on you without your agreement. It means a third party (the receiver) appointed, usually by a state or federal court or a federal agency, to take over a business and its assets. The court or agency that appoints the receiver will ordinarily oversee the receiver’s activities. The receiver’s duties are usually spelled out in the order appointing the receiver. A receiver is sometimes appointed to restructure a business. More often it is to liquidate the business. The receiver may enforce the debtor’s claims against third parties, including the debtor’s officers and directors. The receiver will pay the proceeds from such actions to creditors. Receivership generally follows the debtor’s failure to pay debts as they come due. The ease of obtaining a receivership varies considerably among the states. A receiver can usually sell both real estate and personal property, while a UCC sale can only be used to sell personal property. A federal court receiver may be able to stay suits against the debtor in multiple jurisdictions so creditors must participate in the receivership instead of going after assets piecemeal. Unsecured creditors can ask for a receiver as well as secured ones. To offset the advantages, a receivership is fairly expensive and time consuming. The receiver must be paid, may also need a lawyer, and all these costs come out of the debtor’s assets. A state court receiver may have no power to control property in another state, so if a debtor’s assets are spread across the country there might need to be a separate suit in each location where the debtor has assets.
A Composition Agreement
The last three alternatives come from the same place, and it is where we spend our days: a composition agreement, which is a contract between you and some or all of your creditors. A composition agreement provides a structure to reorganize your financial life so that you can stay in business or, at a minimum, better liquidate or sell. It works best where there are relatively few creditors and they have some kind of interest in the business’s future. The best part of a private deal is that you can have it done very quickly and relatively inexpensively, particularly when you owe a handful of larger creditors. Bankruptcies are public and can give the company and the owner bad publicity. A private deal is not public.
The fifth alternative, then, is settling for less than the full balance. A business and its creditors might negotiate a formal contract under which the creditors agree to accept less than the full amount of money owed or give the business additional time to pay its debts. Composition agreements almost always include one or both. That is the heart of what our senior advisors do: negotiate with funders and lenders for less than the full balance owed, rather than sell you another loan.
The sixth is more time. In essence, the problem is in timing. So you run into some financial difficulties, and feel that you owe it to your creditors to pay up. But you’ve been stymied by your cash-flow problems. So you’ve called your creditors to meet and discuss extending the debt repayment period. A composition agreement can give you exactly that: more time to pay.
The seventh is a standstill. Instead of fighting for money, creditors agree not to pursue collection efforts for a period of time. The idea is to get some respite so the business can try to repair itself. And then there is room for whatever other terms are needed to make the deal happen. It’s a contract, so you can make your deal about what your business actually needs.
Bankruptcy Isn’t the Only Tool
So where does that leave you? Chapter 11 can be a very expensive, risky, complicated and time consuming process. And yet, bankruptcy isn’t the only tool for dealing with an insolvent business. Don’t file for Chapter 11 without considering all of your options to reorganize your company and address the debts that are causing you trouble. Remember, too, that many of these tools are open to your creditors as well if you simply refuse to deal with the problem. A first consultation with Delancey Street is free and confidential. We are not a law firm, so if bankruptcy really is the better path, we will tell you so and refer you to an independent attorney.
