Yes. Filing is only one tool, and for a business that is in default but not yet at the point of a formal filing, it’s the job of the bankruptcy lawyer to come in at this stage to explore all the options. Usually that means negotiating forbearance with the lender. You’re in default. You owe the debt, and the lender can take action, but the lender will be forbearing its right to take action for a period of time. It’s a nice way of saying, “Look, I’ll give you some time here, but let’s work out the terms as to what I’m going to give you, and what are you going to do for me.” If the deal’s good enough, the bank will wait, which gives the business a shot at sorting itself out.
In the good old days, the bank simply said, “Go ahead.” Now it’s a long and detailed set of terms in a written agreement. And time is not for free in this arrangement: In the industry, it’s called ”pay to stay.” What the bank is really after in return for that forbearance is certainty and no surprises, and the right to enforce without a fight if you default.
It is the duty of the bankruptcy lawyer, first and foremost, to develop a plan, to answer the question, “What are we going to do for the lender?” You can cut costs, find new working capital, get a new lender or sell all or part of the company to pay back the bank. But a lender may suspend collection only briefly, requiring you to hire a professional to review the business and write the plan. Not every business can be saved this way, though. If a formal filing is inevitable and no other option is reasonable, it may make more sense to file right away.
Owners also need to be realistic about leverage. The business needs money and has little time to raise it, while the lender has the money and plenty of time to consider how much it needs to be paid. Lenders always have the upper hand, which is why they won’t give up much ground. Where both sides have something to gain, though, the imbalance is no reason not to try.
The Milestones
How much time can a business expect? Lenders like to keep the first forbearance period short, typically three months, and then agree to an extension if the terms are being met. It’s almost never an open-ended forbearance. If the plan is to sell, the milestones might look like this:
- Hire a financial advisor within two weeks,
- get letters of intent from buyers by day 60,
- sign a purchase agreement by day 90,
- and get the lender paid out by day 120.
Agree to a weekly cash flow forecast that becomes part of the agreement, and if you fall too far short of it, that counts as a default. These milestones allow the lender to assess progress and to determine whether the remedy the plan proposed is helping the business at all. They also help the lenders decide whether to extend the forbearance period. A forbearance agreement is a breathing space, but it’s time that needs to be used productively. And the forbearance agreement is not a flow-through guarantee that the cash flow is going to magically become better during that forbearance period.
Forbearance doesn’t come cheaply. In exchange, the business and the owner (if the debt was guaranteed) will have to acknowledge in writing how much is owed, and admit the lender’s security is in good standing. You also might have to agree to release all your claims and defenses against the lender. Those are important things, which the bank is often not willing to give up. The interest rate will go up, too - sometimes from prime plus one to prime plus four or five. There’s also a forbearance fee, which some say is 0.25 to 2 percent annually, while others say up to 5 percent. The price reflects the relative bargaining positions of the lender and borrower.
That doesn’t mean the business has to take the bank’s first draft. A good lawyer will push back on whatever is truly unacceptable or unreasonable. Look closely at the default terms. In many, you could default without getting a notice, and they’ll give you no time to fix it. It’s reasonable to ask for written notice and at least 24 hours to cure. You can also try to narrow the scope of what you can release, get an extension for closing a deal after the deadline, and negotiate lower or no fees for prepaying the loan or achieving milestones. Better to get this position nailed down while both parties are at the table than to wait until the deal is nearly closed. It’s not a battle of wits, but it is a negotiation.
A forbearance agreement is no magic wand. It’s just a contract, and the courts will enforce it only to the extent that it’s legal. (They don’t like agreements that try to tie their hands, for example, so a clause that bars you from filing for bankruptcy protection may not hold up.) It should be signed by all the guarantors and each party should have independent legal advice. Any changes to the terms should be in writing, and other creditors, though not at the table, have a real stake in the transaction and can challenge terms that go too far. If the business is already over the top, there’s not much the agreement can do for it.
So can a business bankruptcy lawyer negotiate instead of filing? Often, yes. Filing is important, but sometimes better options are available. A well-negotiated forbearance agreement gives the business time to restructure, knowing the lender can’t take sudden action while the terms are met. None of this would make sense if there wasn’t some opportunity for the business to turn it around, the lender to recover its debt and both to get what they want in the end.
