The negatives of bankruptcy are well-documented, even for massive businesses: high professional fees, a public process that can take value away from a business, and customers who may leave when they hear about the filing.
In bankruptcy, the debtor is accountable to the Bankruptcy Court, the Department of Justice and a committee of creditors. Costs and results vary by business. Bankruptcy also brings a loss of control: the company is scrutinized by outside overseers who review major steps, and the costs can be significant, especially for smaller companies.
Settling with Your Unsecured Creditors
There’s an alternative: what’s known as a “composition,” which involves an informal, private restructuring outside the Court system, where the debtor negotiates settlements on unsecured debts with vendors, landlords and other creditors. No single statute dictates how an out-of-court workout should go, though contract law and other general legal rules still apply.
In this scenario, being a strong negotiator and communicator is essential to achieving your goal of reducing the claims of creditors in a way that will allow you to get back on your feet. In doing that, being able to predict creditors’ psychology in the process is critical.
In some ways, it sounds like an easy process, but in reality, successfully negotiating a composition with your creditors is much more difficult than it sounds on its face. That’s because there are a great deal of one-on-one interactions that have to take place - it can be a draining and lengthy process that involves the settling of a lot of individual accounts - and big, influential creditors might demand a better deal for themselves than is being offered to smaller, less influential creditors.
Any confidential deal that you think you can make confidentially will not remain confidential forever. In fact, if one creditor hears about such a deal, others will want the same deal for themselves, and this can derail the whole composition process.
A debt summary can show the balances owed to each creditor. The share of unsecured trade debt held by the largest creditors varies by business. Any proposal to settle the creditors’ claims requires their agreement.
Remember who speaks for you. If you have an executive leading your negotiation process, they may be asked questions to which they provide poor answers. Having a senior-level executive (the CFO, CEO, COO) at the meetings and conference calls, while creditors only deal with your attorney, financial adviser or chief restructuring officer, can help to avoid poor answers to unexpected questions that come up.
Have a single point person responsible for all communications with creditors to answer individual creditor inquiries. Keep records of creditor contacts and respond on time; bring legal notices promptly to independent counsel. Have your senior team create a list of FAQs, with an attorney-approved script.
Independent counsel can advise whether a confidentiality agreement is appropriate before information is shared. The agreement’s scope and wording define what information it covers. An NDA that’s too complex probably won’t get signed and will be referred to the creditor’s lawyer for review.
Even with NDAs, information can get in the wrong hands and be misinterpreted, and that can affect the relationships with your customers and your vendors. A competitor may make a play for your accounts, and you want to keep your material as streamlined as possible - this is not the time for sensitive documents to be made available on printouts.
Preparation before your initial meeting: Before the meeting, a senior manager should make an individual call to each of your invited top-20 creditors. Are they hostile or supportive? Are they interested in retaining the account? Can they support an agreement? What are the issues that bother them? Why? So you understand who wants to make a deal, who doesn’t want to make a deal, who’s hostile and who’s happy to continue doing business with you and what their issues are. This way you can prepare appropriate responses to the questions that are likely to come up. If you can predict what will be asked, you can avoid surprises.
Understand who represents each of your creditors - their individual motivations and needs are important. Ask about each representative’s concerns and authority to discuss proposed terms.
It’s important to know that after you walk out of the room, your creditors will be talking to each other. It’s critical that you have supportive creditors in the room helping to sell the compromise that you’re asking for.
Consider having a friendly creditor make the call. If you can recruit a friendly creditor to be your advocate, they will have a more credible voice with other creditors than you do. Creditors may choose to form a committee and select their own independent counsel. A continuing business relationship may benefit both sides, but full repayment is not assured.
Make your pre-meeting calls to creditors modest in scope. Describe your situation accurately; independent counsel can review disclosures about a liquidation analysis or possible creditor recoveries.
The message should be that you can run your business but are experiencing cash-flow difficulties. That’s why you’re asking for a meeting to discuss a compromise - one that’s fair to everyone. If asked about a discount, explain accurately what is under consideration and what remains undecided.
A liquidation analysis shows the liquidation value of the assets and what would be available to pay unsecured creditors, net of secured claims, priority claims and administrative claims. Any discussion of Chapter 11 reorganization plans should clearly distinguish existing plans from possibilities. In presenting your situation, you should consider what would be available in a liquidation or in Chapter 11, as opposed to what you’re offering in your negotiation.
In addition, you should include high-level cash-flow and income projections, based on the assumption that your composition will be adopted. This may help creditors assess the proposal, but projections do not guarantee recovery of their losses.
All creditors would ideally like to be paid in full - and in some cases, you may be able to offer that in the composition, extended over time and without paying interest. What is most important to the creditor is the amortization period over which the creditor will get paid, along with whether you’ll be able to make a lump-sum balloon payment to pay off the obligation sooner.
As creditors agree to the stretching out of their terms of repayment, they may become more flexible. You might then be able to talk with them about forgiving the remaining balance. Try to arrange such a forgiveness when you’re able to deliver substantial new orders to the creditor.
The creditor’s attorney may contact you in advance. This is a call to take, to see how friendly the lawyer is. A lawyer may have different interests and goals than the creditor he or she represents. The creditor’s lawyer may ask questions about the proposal and supporting records.
Independent counsel you hire separately can address legal questions raised by the creditor’s lawyer.
Keep discussions factual. At meetings, creditors and their lawyers may ask detailed questions about the proposal. Answer questions accurately; if information is missing, explain what needs checking and follow up promptly. Keep a record of questions and responses. Remain calm and bring legal questions to independent counsel promptly.
The creditors will ask bluntly what you’re offering and how bad it is. How to answer? Admit that there’s a problem and you’re working on an analysis of it. Explain what your records support about business viability and repayment; any extension requires creditor agreement. Why might creditors hesitate to agree? Early in negotiations, creditors may need more information before considering a request. The real offer will come later, after you’ve conducted your analysis.
Any switch to cash terms requires agreement and does not change existing debts or payment deadlines. Negotiations do not change payment obligations or stop collection or legal action; revised terms require creditor agreement.
In later rounds, projections and a professionally reviewed liquidation analysis may help creditors compare the proposal with other possible outcomes. Be prepared to make several increases in your offer - but not give the appearance of pushing the creditors to those conclusions. As you go through those rounds, give the creditors the analysis that supports each increased offer you make; they’re more likely to accept an offer if they come to their own conclusion on the basis of the facts you present.
A composition can be an effective, economical restructuring tool - but to be successful, the process has to be managed tightly. Strategy needs to be constant and you need to maintain close touch with creditors, who should feel like winners. You can’t afford to lose control of the process - and if you do, the advantages of a composition compared with a bankruptcy will vanish. A composition may avoid a bankruptcy filing, but it can still involve legal costs, collection, and lawsuits.
The Venue
Careful consideration should be given to the venue and to how the meeting with the creditors should be handled.
A conference call? A video-conference? Your office? Your advisor’s office? An airport-hotel meeting room? It depends on the geography of your creditors, COVID-19 and willingness to travel. But if your creditors have big claims, there may be enough reason to travel.
At in-person or video-conference meetings (via Zoom, GoToMeeting, or WebEx), creditors have the ability to coordinate with each other. Creditors may have different concerns, which can affect the group discussion. Management needs to weigh the creditor relationships and make a judgment call before bringing the creditors together.
It’s a bad idea to hold your meeting at your place of business - it will only have an unsettling effect on your employees, adding fuel to the rumor fire. It’s similarly not a good idea to hold a meeting at an attorney’s office. Creditors may bring their own lawyers to any meeting.
At an in-person meeting, don’t sit around tables, since people sitting around them usually don’t listen to what’s being presented. There should be an uninterrupted presentation, with PowerPoint slides - no handouts on paper (sensitive data could get to your competitors). Have a question-and-answer session, and then adjourn.
If an in-person meeting isn’t feasible, or you simply don’t want it, a conference call can work, using listen-only mode, with questions taken by email or text. A webinar can be effective if creditors have a clear way to ask questions and receive responses. Allow time to address creditor questions and follow up on unanswered points. “Listen-only” mode will allow you to stay on track with your presentation.
Video-conference meetings have been gaining popularity and provide a more personal interaction. They’re a hybrid of an in-person meeting and a phone call. In a video conference, the meeting should be managed like a phone call, but you have the advantage of monitoring the creditors’ reactions to your presentation. On the video, you’ll be able to see their faces: Who’s nodding, who’s frowning? This should help you determine with whom you should follow up afterwards.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: negotiate proposed settlement terms with creditors, subject to their agreement. We are based in New York. We tell you how it is; because your business and future is on the line.
