7 Tips for Preparing to Avoid Unnecessary Issues During a Business Bankruptcy
While successfully navigating the business bankruptcy process can help companies restore their financial stability and get back on the path toward long-term growth, issues during the process can lead to less-than-satisfactory results. As a result, avoiding unnecessary issues is essential. What can companies do to avoid unnecessary issues during the business bankruptcy process? Here are seven tips from an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman.
Tip #1: Make Sure Bankruptcy is the Best Option
One of the most important steps companies can take when contemplating reorganization under Chapter 11 is to ensure that bankruptcy is the best option. While reorganizing under Chapter 11 will be the best option in many cases, there are alternatives that will be more favorable in some circumstances. For example, some potential alternatives to a Chapter 11 filing include:
- Renegotiating with the company’s lenders
- Renegotiating with the company’s vendors or customers
- Conducting an assignment for the benefit of creditors
- Entering into forbearance agreements
- Restructuring the company’s internal operations to improve cash flow
Depending on a company’s specific circumstances, these options (among others) may or may not provide the financial stability the company needs. But, evaluating all potential options will allow the company’s leadership team to make informed decisions. If a Chapter 11 filing is the best option, confirming that this is the case will allow for confident and strategic decision-making going forward.
Tip #2: Evaluate Potential Creditor Claims and Defenses
While companies that file under Chapter 11 are entitled to significant protections under the U.S. Bankruptcy Code, creditors have rights during the bankruptcy process as well. With this in mind, when evaluating the viability of a Chapter 11 filing, it is important to assess the viability of potential creditor claims and defenses as well. Some examples of potential issues in this area include:
- Reclassification claims
- Fraudulent transfer claims
- Preferential transfer claims
- Turnover actions
- Equitable subordination actions
Here too, these are just examples. Creditors can challenge companies’ efforts to reduce or eliminate their outstanding debts on various grounds, and many creditors will fight to protect their financial interests by all means available. By anticipating potential creditor claims and defenses—and by preparing for them in advance—companies can help ensure that the Chapter 11 bankruptcy process is as smooth and uneventful as possible.
Tip #3: Develop a Strategic Reorganization Plan
These days, most companies that pursue reorganization under Chapter 11 do so under subchapter V. This is a relatively new provision of the U.S. Bankruptcy Code that establishes streamlined procedures for “small business” bankruptcies. Currently, the debt limit for filing a “small business” case under subchapter V is $7.5 million.
When filing under subchapter V, companies must submit a proposed reorganization plan within 90 days of starting the process. Usually, however, it will make sense for companies to include a proposed reorganization plan with their initial filing. Companies have the option of submitting a proposed reorganization plan in traditional Chapter 11 cases as well. Along with the financial considerations involved, there are also various strategic considerations involved—and working closely with experienced bankruptcy counsel to develop a strategic reorganization plan can help companies avoid issues that have the potential to add costs and delays to the process.
Tip #4: Gather All Necessary Documentation
From evaluating potential creditor claims and defenses to developing a strategic reorganization plan, essentially all steps in the Chapter 11 reorganization process require some form of (and, in many cases, multiple forms of) documentation. Gathering this documentation up front can also help companies avoid unnecessary issues and delays.
For many companies (and especially for larger companies), gathering the documentation needed for a Chapter 11 bankruptcy can be a time-intensive and resource-intensive process. An experienced Chapter 11 bankruptcy lawyer will be able to assist with taking a structured and systematic approach to gathering the necessary documentation—and will also be able to assist with keeping the company’s documentation organized so that individual documents can be readily retrieved as necessary.
Tip #5: Make Sure the Business Can Continue Operating in the Ordinary Course
When evaluating the viability of a Chapter 11 filing, a key factor is the business’s ability to keep operating in the ordinary course. If the business won’t be able to make payroll and continue operating day-to-day even with the protections afforded by the U.S. Bankruptcy Code in place, then pursuing reorganization under Chapter 11 may not be a viable solution. With that said, there are options available, including the option to seek debtor-in-possession (DIP) financing.
Tip #6: Consider Debtor-in-Possession (DIP) Financing if Necessary
Debtor-in-possession (DIP) financing is a special form of financing that is specifically available to companies going through a Chapter 11 bankruptcy. In most cases, it is intended to serve as a bridge between the beginning and the end of the bankruptcy process. If reorganizing is a viable long-term solution but getting through the bankruptcy process itself is potentially untenable, then seeking DIP financing could be a good option.
Tip #7: Avoid Extraordinary Business Transactions (and Be Prepared to Seek Approval if Necessary)
Finally, while companies must generally be prepared to continue operating in the ordinary course when going through the Chapter 11 bankruptcy process, they must also be careful to avoid engaging in transactions that may be classified as “extraordinary” under the circumstances at hand. Engaging in extraordinary transactions (without court approval) can subject Chapter 11 debtors to fraudulent transfer and preferential transfer claims—potentially among others—so an informed and strategic approach is essential here as well.
Schedule a Complimentary Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman
If you would like more insights about pursuing reorganization under Chapter 11, we invite you to get in touch. We have extensive experience guiding companies of all sizes through the business bankruptcy process. To schedule a complimentary consultation with an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, give us a call at 305-768-9909 or tell us how we can get in touch online today.
