Renegotiating and Restructuring During the Chapter 11 Process
Businesses that have filed for bankruptcy under Chapter 11 can leverage the process to renegotiate and restructure their debts informally in many cases. This can often substantially shorten the timeline and reduce costs. However, businesses must be careful to avoid entering into agreements that unduly impair other creditors’ rights. This is one of many aspects of the process where an experienced Miami business bankruptcy attorney can help.
While going through the Chapter 11 bankruptcy process involves formally reorganizing a business’s debts so that it can avoid defaults, foreclosures, and other means of collection, businesses can—and frequently do—negotiate outside of the formal bankruptcy process as well. This can prove to be a highly effective approach in many cases, as creditors will often prefer to negotiate informally rather than investing the time and costs involved in protecting their rights in court.
With that said, when renegotiating and restructuring outside of the formal business bankruptcy process, businesses need to be careful to avoid unduly disadvantaging their other creditors. This can lead to disputes (and potentially litigation) that frustrate the purpose of negotiating informally. An experienced Miami business bankruptcy attorney can assist with making informed and strategic decisions and can engage in both formal and informal negotiations with the business’s creditors as warranted.
Financial Obligations that Can Be Renegotiated and Restructured
Businesses can (and do) renegotiate and restructure all types of financial obligations outside of the formal Chapter 11 process. Businesses can potentially revisit other agreements as well, and counterparties will often be willing to renegotiate to protect important business relationships and their own long-term financial interests. Some examples of contracts that it may be beneficial to renegotiate or restructure include:
- Commercial real estate leases
- Customer and client agreements
- Equipment and vehicle leases
- Financing agreements
- Vendor and supplier agreements
Again, these are just examples. Ultimately, what makes sense in any particular case will depend on the specific circumstances at hand. When preparing to go through a Chapter 11 bankruptcy, business owners and executives should work with their company’s legal counsel to make informed and strategic decisions about how to address each pertinent agreement with a focus on securing a comprehensive resolution that maximizes the company’s financial flexibility going forward.
Leveraging the Ability to Reject Executory Contracts
Section 365 of Chapter 11 allows businesses to reject executory contracts during the reorganization process. An executory contract is any contract under which both parties have continuing performance obligations. If a business rejects an executory contract during the bankruptcy process, the business remains liable for any amounts already due under the contract, and the creditor on the other side of the contract can pursue a claim for rejection damages.
Even so, a business’s ability to reject executory contracts can provide significant leverage in contract renegotiations. Pursuing a claim for rejection damages won’t always (or often) be palatable, and for creditors facing rejection, the least-costly option will be to renegotiate in many cases.
Key Considerations When Negotiating Outside of the Formal Chapter 11 Process
As mentioned above, when renegotiating outside of the formal Chapter 11 process, businesses need to be careful to ensure that they do not unduly impair other creditors’ rights. With this in mind, some key considerations when pursuing informal renegotiations or restructuring include:
- Different creditors’ “priority” rights
- The potential for preferential transfer allegations
- The potential for other defenses to discharge
- The costs of “assuming” (rather than rejecting) executory contracts
- The benefits of leveraging the formal Chapter 11 process
Here too, these are just examples. By giving due consideration to all potential legal and financial concerns—and by taking a comprehensive and cohesive approach to the process—business owners and executives can ensure that they are leveraging the benefits of the process to the fullest extent possible.
Using “Section 363 Sales” and Debtor-in-Possession (DIP) for Greater Flexibility
Along with renegotiating and restructuring their financial obligations and other agreements, businesses that have filed for Chapter 11 bankruptcy may also have various options for achieving even greater financial flexibility. For example, conducting “Section 363 sales” allows businesses to get rid of unneeded encumbered assets, while businesses can use debtor-in-possession (DIP) financing to manage their operating costs while they work toward a long-term solution.
Seeking Approval When Required
Finally, businesses that renegotiate or restructure their financial obligations outside the formal bankruptcy process may need to seek the bankruptcy court’s approval before finalizing their deals. While the U.S. Bankruptcy Code generally favors debtors’ ability to work out informal resolutions, it also provides creditors with various protections—and businesses must respect these protections when necessary.
FAQs: Regaining Financial Stability and Flexibility in a Chapter 11 Bankruptcy Proceeding
Can businesses negotiate with their creditors outside of the formal Chapter 11 process?
Yes, businesses can negotiate with their creditors outside of their formal Chapter 11 proceedings—and this is a common part of the process.
What are the benefits of negotiating outside of the formal Chapter 11 process?
Negotiating outside of the formal Chapter 11 process can expand the options that businesses have available while also minimizing the costs involved in pursuing reorganization. By engaging directly with their creditors, businesses can also help preserve important relationships and provide creditors with confidence that they have a clear plan for the future.
Does it make sense to try to renegotiate with creditors before filing under Chapter 11?
While filing under Chapter 11 affords several benefits—and businesses should not wait to file when filing is the best approach—reaching out to creditors informally can also be a highly effective strategy in many cases. There are a variety of alternative solutions that businesses can pursue when it makes sense to do so
Schedule a Call with a Miami Business Bankruptcy Attorney Today
If you need to know more about your company’s options for dealing with financial distress, we invite you to get in touch. To schedule a call with an experienced Miami business bankruptcy attorney at Edelboim Lieberman, please call 305-768-9909 or request a free initial consultation online today.
