Something Other than Chapter 11
When a business is drowning in debt, a lot of owners assume Chapter 11 is the only lifeline. It isn’t. Reorganizing under Chapter 11 is the right move, and sometimes the necessary one, for many companies. It’s certainly possible to do something other than Chapter 11. And it’s hard to have the right conversation until you know what the options are. Here are five worth weighing before you file.
The first is a forbearance agreement. A forbearance agreement is a deal in which the creditor agrees not to foreclose or otherwise take collection action against you for the time being while you catch up on past-due debts. It’s something you negotiate directly with the creditor, outside of bankruptcy. When it comes to forbearance agreements, there’s no such thing as a free lunch. The creditors want their agreement to make it clear they are not waiving their right to repayment or their right to declare a default in the future. They also don’t want to create a “course of conduct” of not acting on defaults. In other words, there’s so much language in a forbearance agreement that’s there so that creditor “doesn’t lose its rights.” The financial relief you get is just one part of the deal — you have to consider the whole agreement. Negotiate really carefully. Make sure you understand what you are promising up front, and make sure the language leaves you room to move.
The second is informal debt restructuring. Early in the game, an owner can go to its creditors informally to reorganize its debt on a consensual basis. When a business is struggling to pay its bills as they come due, it would be in both parties’ interest to enter into an informal restructuring rather than head for reorganization or litigation. Timing is everything when it comes to an informal debt restructuring. You have to persuade the creditors that your business really needs help and that they have an interest in providing it, but you can’t wait so long that they give up on your business and start exercising their collection rights, including filing an involuntary bankruptcy petition. Don’t wait until you’re already dead to have your funeral.
The third is to renegotiate your contracts with lenders, vendors and customers, either alongside a restructuring or instead of one. You need to assess every contract you have. Then create an action plan of which contracts to renegotiate first. Concentrate on contracts with people you need to stay close to. Bankers, vendors and customers you rely on most. Timing matters here too: renegotiating before you fall into default can put your business in a stronger negotiating position and help you keep essential relationships. These parties are not obligated to renegotiate, and some may be unwilling, if only at first. Be careful, too, about how much you tell customers. A customer who learns you are in trouble may decide not to place an order with you, for fear you will not be able to deliver.
Ways to Improve Your Business
The fourth alternative doesn’t involve your creditors at all. There are ways to improve your business before you turn to creditors for help. Look to see where money can be saved: curtail downtime, shorten the production cycle, and so forth. Options might include streamlining your operations so you get more product out of the same effort, implementing artificial intelligence (AI) technologies, and reductions in force. These can save you money, increase revenues, or both. You can see immediate or long-term benefits from these adjustments. If you are successful, you may be able to eliminate the need, or at least lessen the need, to seek concessions from others.
Assignment for the Benefit of Creditors
Finally, there is the assignment for the benefit of creditors, or ABC. An ABC is a good idea if the company is beyond saving, but the business owner wants to completely liquidate its assets and wrap up loose ends before moving on. With an ABC, you assign your assets and liabilities to an intermediary – usually a law firm experienced in insolvency – that sells off your assets to pay the debts. The end result is much like a Chapter 7 bankruptcy, but it can be faster and less expensive than a Chapter 7 filing. It’s done behind the scenes, without public filings, and it avoids the credit-related impact of a formal liquidation. And when you can’t avoid winding down, an ABC might be the best path forward for everyone.
None of these paths is right for every business, and Chapter 11 is still the necessary answer for some. It’s critical to know what your other options are before making such a choice. Please contact Delancey Street if you have questions about the best path forward for your business. A conversation is the first step, and we’re here to have it with you.
