June 2018 Newsletter – Bankruptcy – It’s Not Just for Large Companies in Financial Distress

Bankruptcy – It’s Not Just for Large Companies in Financial Distress

Bill Long, CPA – Partner

Most business people think a Chapter 11 bankruptcy filing is just for large corporations in financial distress. Bankruptcy is often viewed as only for dead or dying companies. The truth is anything but that – Chapter 11 bankruptcy is about reviving companies and maintaining jobs.

Small and mid-size businesses have found success filing under this chapter. Effective use of the provision of the Bankruptcy code can be beneficial in a number instances as outlined below:

  • A Chapter 11 filing may be an excellent option to resolve pending or ongoing litigation that has the potential to result in a large judgement that could render the company insolvent. The threat of a filing can also result in a more reasonable settlement without an actual filing. However, never threaten to file without being fully prepared to follow through and file.
  • The threat of a filing can cause some creditors to consider making significant changes in debt instruments or to write down debts without going through the filing process. Working with our clients’ corporate counsel and bankruptcy counsel, we have helped them successfully reorganize without a filing resulting in improved balance sheets, reduced costs, and improved profitability. All this can be achieved without the actual cost of a full Chapter 11 filing. This is an excellent option for companies where a true filing could result in significant amounts of lost revenue and customer confidence.
  • We have also worked with our clients, their counsel and creditors to go through a pre-packaged or pre-negotiated Chapter 11 filing that results in a much faster approval of a pre-arranged plan of reorganization. This option combines the most attractive features of Chapter 11, and out-of-court restructuring results in lower overall costs. One of our clients that went through this process emerged from bankruptcy with a much-improved balance sheet and is generating more taxable income than they were making prior to filing.

Some of the advantages of a Chapter 11 bankruptcy filing include:

  • The business can continue to operate while restructuring secured debt.
  • The automatic stay provides an automatic injunction of all lawsuits, foreclosures, repossessions, bank levies and other collection action by creditors.
  • Chapter 11 allows debtors to partially pay back unsecured debts.
  • The filing allows debtors to assume or reject executory contracts and unexpired leases.

Before filing the debtor should also consider some of the drawbacks of Chapter 11:

  • The stigma attached to a filing and what it will do to your customers’ perceptions of your organization. After the rash of filings in 2008 and 2009 this stigma has somewhat diminished.
  • The code requires significant detailed financial records and reporting requirements.
  • A reorganization needs to result in a plan that yields a profitable company going forward.
  • There is always a potential for loss of shareholder control.
  • Cost is a major factor, but think of it this way – few patients would focus only on cost in selecting a heart surgeon. Likewise, a wise debtor should be concerned about more than just cost when deciding to hire professionals to help with a Chapter 11 reorganization, as the quality of the team has a direct impact on the success of the process.

As with any complex business transaction, a reorganization should be carefully planned and executed with experienced legal counsel and financial consultants. Nperspective has helped many clients through this process. If this is something that you think might help your company, we would be happy to discuss it with you and if appropriate recommend bankruptcy counsel for you to work with.

In Conclusion

If your company or one of your clients can benefit from our experience and knowledge, please contact us:

Bill Long 813.230.2376  wlong@npcfo.com
Gary Colbert 941.323.9555  gcolbert@npcfo.com
Russell Slappey 407.448.1781  rslappey@npcfo.com
Alma Kadragic 954-651-8044  akadragic@npcfo.com