When a business is in financial distress, filing for Chapter 11 isn’t the only path forward. Sometimes you need a bankruptcy attorney to guide you, but other times you may find that your concerns can be addressed without a Chapter 11 filing. Before you file anything, it pays to evaluate the full menu of options — to go through the alternatives with a critical eye and see if your business has other solutions for the current situation. Here are five worth weighing.
Before you even consider asking outsiders for help, restructure your own business. Make operations run leaner so they can produce more. That can mean cutting head count (a “reduction in force” or RIF) and deploying new technologies like AI to do more with less. The goal is to cut costs, boost revenue, or both, in a way that can produce results quickly and also stand the test of time. If these measures prove effective, they may eliminate the need to seek concessions from creditors, or at least significantly reduce that need.
If you do need help from outside, the next option is a forbearance agreement. A forbearance agreement is a negotiated deal with a creditor outside of bankruptcy. It gives the business a chance to become current on a past-due obligation without facing the consequences of default. In exchange for forbearing from foreclosure or other collection efforts, the creditor typically insists on protections: the agreement confirms that the creditor has not waived the right to repayment, and it preserves the right to declare default later. The creditor is protecting itself from a ‘course of conduct’ of ignoring defaults. Forbearance agreements don’t erase the debt or release you from your obligations. They just put off the collection. So when you get this agreement, make sure you read all of it, not just the relief you are looking for. An experienced attorney can help you decide whether forbearance makes sense and negotiate the terms.
Forbearance is one form of informal restructuring, but not the only one. There are many ways to restructure debts outside of bankruptcy, and your business may be a good candidate for one if it is struggling to pay its bills when they come due. For both you and your creditors, this is often in the best interests of all parties involved. It lets you keep the integrity of your relationships intact, rather than resorting to the options of reorganization or litigation. Timing is important. You should be able to demonstrate both your need for a restructuring and the shared interest your creditors have in working with you. Don’t wait too long or your creditors may pursue collection actions or even file an involuntary bankruptcy petition against you.
Instead of, or in addition to, restructuring debt, you can renegotiate your contracts with lenders, vendors and customers. Do it before you default so you can negotiate from a stronger position. Doing it in advance helps you protect important business relationships. It’s not always easy: You can’t force vendors or customers to renegotiate, and some are unwilling to do so, at least initially. Before you do anything, look at how much information about your money problems you need to disclose to customers, especially if they aren’t likely to grant concessions or wait and see. If you approach it correctly, renegotiation can work out for everyone.
When a business can’t continue, the owners may want to fold the operation efficiently without filing bankruptcy. They can do that through a process called an assignment for the benefit of creditors (ABC). In an ABC the company turns its assets and liabilities over to an intermediary, often a law firm experienced in insolvency matters. That intermediary sells the assets and uses the proceeds to settle the claims. The result is similar to a Chapter 7 bankruptcy, but it can be faster and less costly. Unlike Chapter 7, the ABC happens behind the scenes. There are no public filings, and no credit impact from a formal liquidation. It is often the right move if closing down is the best choice.
None of these options fits every business, and Chapter 11 remains the right answer for some. It is always important to consider all options. This is what makes for informed, confident, strategic decisions in the best interests of the business and its long-term future.
