Business Bankruptcy: Options and Alternatives for Companies in Financial Distress

For companies in financial distress, pursuing a business bankruptcy can provide a favorable path forward. Liquidation and reorganization bankruptcies both offer a path toward a fresh start—whether this involves shutting down and starting over or remaining in business with a manageable debt load.

But, when considering a business bankruptcy, it is important that business owners consider the alternatives as well. While filing for bankruptcy can make sense for companies facing a wide range of financial circumstances, it isn’t the right choice in all scenarios.

Bankruptcy Options for Companies in Financial Distress

While business owners have a variety of potential options when contemplating bankruptcy, most businesses in financial distress end up choosing between three primary options: (i) filing under Chapter 7, (ii) filing under Chapter 11 and (iii) filing under Subchapter 5.

1. Chapter 7 Liquidation Bankruptcy

Filing under Chapter 7 involves liquidating the company’s non-exempt assets to pay down the company’s debts. This liquidation process typically results in winding up the company’s affairs.

Depending on the non-exempt assets the company has available, liquidation of these assets may or may not result in fully satisfying the company’s debts—and, oftentimes, it will not. While this can leave the business’s creditors without recourse in some circumstances, it is also possible that the company’s owners could remain personally liable for some (or potentially all) the debts the company is unable to pay.

As a result, while filing under Chapter 7 can be a smart solution for companies with relatively few assets, it is important that these companies’ owners make sure they have a clear and comprehensive understanding of the Chapter 7 bankruptcy process’s limitations. If the costs and risks of filing outweigh the benefits, there will most likely be better options available.

2. Chapter 11 Reorganization Bankruptcy

Filing under Chapter 11 involves reorganizing the company’s debts so that it remains viable as a going concern. It is a good option for companies that have solid revenue streams but that have taken on an unmanageable debt load. In a Chapter 11 business bankruptcy, the business’s bankruptcy counsel works with its creditors and the bankruptcy trustee to formulate a payment plan that serves the best interests of all parties involved.

Since pursuing a Chapter 11 business bankruptcy involves committing to a payment plan, it is important that business owners who choose this route are confident in their company’s ability to pay. Failure to comply with a Chapter 11 payment plan can frustrate the purpose of filing for bankruptcy—and lead to additional sunk costs. By making an informed decision about whether to file under Chapter 11 and then working closely with their bankruptcy counsel throughout the process, business owners can structure appropriate payment plans that put their companies on the road to financial stability.

3. Subchapter 5 Small Business Bankruptcy

A third bankruptcy option for companies that are in financial distress is to file under Subchapter 5. This option is available to companies that qualify as “small businesses” under the Small Business Reorganization Act (SBRA). To qualify as a “small business,” a company must have no more than $7.5 million in secured and unsecured debts, with at least 50 percent of its total debt load attributable to business and commercial activities.

Subchapter 5 bankruptcies fall under Chapter 11, but they involve streamlined procedures that minimize both the time and the cost involved. Many businesses qualify to file under Subchapter 5, and when they do, there are often few (if any) countervailing considerations that weigh in favor of a “normal” Chapter 11 proceeding.

Alternatives to a Business Bankruptcy

As we discussed above, while pursuing a business bankruptcy often makes sense, there are scenarios in which companies that are in financial distress will be better off pursuing other alternatives. There are various alternatives to bankruptcy, including both options focused on growing the business and options focused on winding up the business and moving on:

• Equity Infusion (from Existing Owners or Outside Investors) – An equity infusion can inject much-needed capital into the business. Depending on the circumstances, it may make sense for the business’s owners to make additional capital contributions, or it may be time to consider an outside equity investment.
• Internal Restructuring – Restructuring a company internally can also help to alleviate financial distress in many cases. Cutting unnecessary expenses, finding ways to increase sales, consolidating departments, suspending certain operations and various other methods of restructuring can all potentially help to generate positive cash flow.
• Informal Workout (Debt Restructuring) – In many cases, creditors will be open to restructuring financially distressed companies’ debt obligations outside of bankruptcy. These informal workouts can serve the interests of both parties and, when necessary, companies can pursue informal workouts with multiple creditors simultaneously to avoid the need for a bankruptcy filing. Reducing interest rates, extending payment terms and negotiating discounts are just a few examples of options that may be available.
• Assignment for the Benefit of Creditors – Another option that many financially distressed companies can use to avoid the bankruptcy process is an assignment for the benefit of creditors. An assignment for the benefit of creditors is similar in effect to a liquidation bankruptcy under Chapter 7, but it is typically quicker and cheaper, and it also has fewer long-term consequences. Since pursuing an assignment for the benefit of creditors avoids the courts, it helps protect business owners’ privacy as well.

Regardless of your company’s circumstances, the key to moving on from financial distress is to make informed and strategic decisions. This starts with engaging experienced counsel to help you evaluate your company’s options in detail.

Contact the Business Bankruptcy and Restructuring Lawyers at Edelboim Lieberman

Our lawyers have significant experience helping financially distressed companies pursue bankruptcy and the bankruptcy alternatives discussed above. If you have questions about your company’s options, we invite you to get in touch. To schedule an appointment with a lawyer at Edelboim Lieberman, give us a call at 305-768-9909 or contact us confidentially online today.