Alternatives To Chapter 11 Business Bankruptcy

When a business faces financial insolvency, often the owner will decide to file Chapter 11 to restructure debt. However, there are alternatives to bankruptcy that bypass many of the federal restrictions. In an out-of-court workout, a debtor enters into an extra-judicial agreement with creditors that allows repayment and re-organization outside the court process, but the "workout" relies totally on the willingness of the creditors to work with the insolvent business. When there is no hope for reorganization, an alternative to bankruptcy is a general assignment for benefit of the creditors. This is a liquidation alternative to Chapter 7 and is overseen by state courts instead of federal courts. Only some states offer this solution.

Out-of-Court Workouts

In an out-of-court workout, the debtor attempts to solve financial issues through a consensual agreement with creditors outside the court. However, the workout depends entirely on the willingness of the creditors to work with the business and its ability to get out of its financial predicament. If even one creditor demurs, the workout may not be successful.

Before approaching its creditors, the business management must determine whether the business can be turned around. If so, the "workout" will provide repayment to creditors through either future cash flow, refinancing or equity infusion. In a future cash flow scenario, the business must be able to generate additional profit to sustain operations as well as pay off delinquent debt.  In a refinancing, the business needs to find a replacement lender to pay off the existing creditors; however, this can prove difficult considering the business' insolvency. Equity infusion depends on equity investors not being wary of their capital being subsumed by existing debt.

Third party agents exist to work with insolvent businesses to seek out lenders and equity investors who may be willing to work with a troubled company. However, such services are not without a substantial cost and companies should be diligent in engaging agents and professionals who are credible and reliable.

Before asking for forbearance, a business seeking an out-of-court workout must put together a restructuring plan that shows feasibility going forward. This plan should include cash flow projections, profit and loss, and a balance sheet throughout the repayment period.

Assignment for Benefit of Creditors

A general assignment for benefit of creditors is a business liquidation that is governed under state law as opposed to federal bankruptcy law. Laws on assignment vary by state. There is no reorganization under an assignment. Under this alternative, an independent assignee is chosen (either by the business and/or the creditors) to serve as a fiduciary to the business' creditors. The assignee's role is similar to that of a a bankruptcy trustee in that both are responsible for liquidating the assets and getting the most value from the proceeds. A business initiates an assignment through a written transfer of its assets to an assignment estate. The assignment estate is overseen by the assignee.

Management files a schedule of assets and liabilities as well as a full list of with the names and addresses of all creditors. The assignee subsequently notifies all of the creditors that an assignment has been filed. Creditors are allowed to file a claim with the assignee by a specified deadline, much as they would with a bankruptcy trustee. The one comparative negative is that assignment does not have the automatic stay offered through the bankruptcy proceeding. However, most creditors do tend to co-operate and cease collection actions as such actions would be unnecessary.

As with a bankruptcy, once the creditors and assignee are fully paid, any residual funds are returned to the business.

Talk with an Attorney

If your business is facing insolvency and you want to avoid judicial bankruptcy, you have extra-judicial alternatives. Talk with an attorney experienced with bankruptcy alternatives in your state.