9 Steps to File Business Bankruptcy (and 4 to Take First)

If you’re considering a restructuring or bankruptcy, make sure you plan ahead. Failing to do so could mean the difference between surviving and failing. Bankruptcy isn’t easy. Just ask a bankruptcy attorney. It’s expensive. You lose some decision-making ability. And even in Chapter 11 (where the company continues to be run by its management), you must report information to the court that you would otherwise keep private (one bankruptcy judge characterized this as “your financial underwear on display”).

Four Things to Do Before Filing

Many people think that filing for bankruptcy is an easy option. Bankruptcy lawyers see filing as a last resort, not an easy one, and that there are options that can be tried first. Here are four things to do before filing, and then nine steps for the filing itself.

First, understand your alternatives. You can restructure outside of the court. In Chapter 11, you can sell a portion or all of your assets, or restructure your business’s debts by offering a reorganization plan which is approved by the court. If you can’t restructure the business on your own, you may need to sell your business’s assets to a third party. Few buyers will pay anything close to fair value unless they have assurances they are buying the business free and clear of all of the historical liabilities. Bankruptcy provides those assurances.

Second, be ready for a sale. Most owners end up selling in a Chapter 11. It’s a 363 sale, sale of the business outside a plan. According to one Atlanta bankruptcy attorney, today almost all Chapter 11’s, 90 percent, are resolved with a sale of the business rather than with a plan that converts debt to equity or with a new infusion of equity. A sale is faster, easier and cheaper, and creditors usually don’t want to be equity holders. Even if the owner wants to do a restructuring, creditors may prefer a sale. So the business may be in play once it is in bankruptcy.

Third, find out how cooperative the lender is likely to be. That’s one of the first things a restructuring professional advises determining.

Fourth, begin to plan. “I tell my clients that every day of preparation before a Chapter 11 filing is equal to two days while in Chapter 11,” a lawyer says.

Nine Steps

Once you decide to file, these are the nine steps.

Step one: get yourself an experienced bankruptcy lawyer. Don’t make the mistake of thinking you can go it alone.

Step two: add a financial advisor with distressed business experience. A successful restructuring involves a meeting of the minds of experienced lawyers and financial advisors, people who know what’s around the next corner. One restructuring partner advises that it’s almost always worth it.

Step three: If you’re a medium to large business, consider hiring a chief restructuring officer to help you navigate the process. This will allow your CEO and CFO to focus on running the business instead of potentially having to work a full-time job reorganizing the company.

Step four: you need to plan carefully in advance of filing: “Otherwise, you’re very likely going to fail,” warns a restructuring professional.

Step five: what about the idea of a pre-packaged bankruptcy? In a prepack, a plan of financial reorganization that your creditors have agreed to is filed close to the same day as the Chapter 11 filing. An attorney says that with a pre-packaged bankruptcy a company can be in and out of Chapter 11 in as little as 60 to 90 days. Otherwise, a case can take many months, even years.

Step six: have your first-day motions ready. What are some of the main things you’ll need to do in the first few days? You’ll have to make sure that the doors are kept open and that the employees and vendors get paid.

Step seven: you have to be prepared to disclose stuff to the Court that you wouldn’t normally have to disclose in a private company. This is even true in Chapter 11, where you get to retain control of the business.

Step eight: You’ll need to decide if you want to go through a 90 or 120 day sale process, or if you want to try to stabilize the business and then try to do some sort of debt-for-equity swap.

Step nine: Realistically, Chapter 11 reorganization can take months if not years. There’s a lot of factors to go into this: who your primary creditors are, your debt, how aggressive your primary creditor is going to be, whether you will be able to secure financing, if you’re up against the IRS, if you’re dealing with a judgment creditor. So there are a lot of factors. Obviously, every situation is going to be unique.

Being Prepared Is Paramount

Whether or not you decide to sell or restructure, being prepared is paramount. Bankruptcy is expensive and there will be an element of loss of control over the decision, so it should be considered only if absolutely necessary.