To file or not to file? No owner wants to face that question. Yet bankruptcy remains a last resort for many small companies and small company owners, because even though it makes sense on paper, it looks and feels difficult and involved. Bankruptcy can also be seen as too drastic or as a way of ceding to failure. But sometimes it’s the best option. And sometimes it’s not. In certain cases, the business needs to file for bankruptcy. In others, the company does not need to, and can restructure its debts outside of bankruptcy. So yes, a turnaround without bankruptcy is possible in 2026. Some small companies are in a strong enough position to get their hands around their debts and turn their fortunes around without resorting to a bankruptcy filing. What are the circumstances in which that makes sense? What are some of the alternative strategies?
Even when the economy is strong, a single business can still be pushed to the brink by forces of its own. The symptom may be excessive debt, a supply chain that breaks down, or heavy litigation. In a perfect world, of course, none of these would be an issue. The bad news? That world does not exist. The good news? You have plenty of tools in your toolbox.
Chapter 11 of the U.S. Bankruptcy Code
The most famous choice is Chapter 11 of the U.S. Bankruptcy Code, and Congress has made that more available to small companies: the CARES Act expanded the debt limits in the Small Business Restructuring Act, which means more small businesses can use that law’s streamlined Chapter 11 process. But a bankruptcy court is not the right place for every struggling business. Other court-supervised choices, like a receivership or an assignment for the benefit of creditors, might be a better fit for a company’s situation. And in some cases, a business can restructure debts without any court process at all, which is often the fastest and least expensive method.
Businesses that file Chapter 11 have a few things in common. The strongest candidates will have a business that can survive if allowed to keep breathing for a while without creditors hounding them. A business that has valuable equity in assets that would be lost to repossession or foreclosure might also be a good candidate. Other companies use the process to sell. A Chapter 11 sale happens when a company sells its business in a bankruptcy court instead of reorganizing and working to pay its debts over time. These deals are also known as 363 sales, named after Section 363 of the Bankruptcy Code. The law allows the debtor to sell its business free and clear of its debts and burdensome contracts, and whatever assets and creditor claims remain are handled in the bankruptcy. It is perfectly legal for a debtor to use Section 363 for this purpose.
Then there is the money. Most debtors cannot get through Chapter 11 on cash flow alone, even while cutting costs hard, so in almost every case of any size the company needs debtor-in-possession, or DIP, financing. So acquiring a DIP loan can be critical. The second cost that businesses typically don’t appreciate is that their operations become subject to an extraordinarily close scrutiny. A creditors’ committee and the U.S. trustee get broad rights to investigate the company’s books and transactions.
The benefits of Chapter 11: It can provide comprehensive debt relief, and give a fresh start under court oversight. But there’s a price to pay, and it’s not the only game in town. There are two main ways to restructure in which the business works with its creditors without filing anything with the court.
Out-of-court Restructurings
The first tool is the “creditor composition,” a deal between the debtor and its creditors, but also a deal among the creditors. Basically, all, or most, of the creditors agree not to sue for the debts in exchange for payments from the debtor. Often the creditors take a reduced payoff, or allow installment payments, or both. For the owner, this kind of arrangement gives them much-needed breathing room. Instead of having to pay off creditors as soon as possible, they can pay the agreed-upon amount over time. For the creditors, the composition can avoid the “race to the courthouse” that would otherwise occur among the secured lenders and trade creditors, which could push the debtor into bankruptcy, where the trade creditors may get back much less than the composition would give them.
The business has to give something back for that forbearance. Creditors are typically provided with regular financial reports from the business, and the agreement may limit executive salaries and prevent the business from disposing of its assets. The bigger catch is participation. A composition needs widespread, nearly unanimous buy-in, and getting that from a long list of creditors is a daunting task.
That is why the second route deals only with the financial creditors, such as the company’s bank lenders. Bank creditors don’t like unpaid loans, and in this kind of workout agreement the creditors may agree to defer payments, extend the maturity date, or reduce the principal amount owed. In each instance the restructuring is different, and each lender workout agreement is negotiated differently. The bank will want something in return, though. The business is usually required to affirm its debts, offer additional collateral and accept stricter financial reporting, to give the bank the information that it needs to monitor the business.
For the owner, staying out of court has real advantages over Chapter 11, as long as the company has a manageable number of creditors willing to cooperate. More often than not, out-of-court restructurings can save companies from the long haul of bankruptcy court. And keeping the matter private usually means that less scrutiny is possible for the board, the officers and the lender. That can shield all three from the lawsuits a Chapter 11 case may set off.
Turn Itself Around Without Bankruptcy
So can a small company turn itself around without bankruptcy? Often it can, if the owner has honesty about the situation and can create a plan to move forward. Every path, from Chapter 11 to a composition or a bank workout, has its own advantages and drawbacks. Financial advisers and lawyers are of great help here, so talk to experienced ones before you make any decisions. Be realistic about your prospects and act early. After all, if a small company is going to restructure its debts, it is important to get as much as possible out of that restructuring.
