Strategic Considerations for Reorganizing Under Chapter 11
Reorganizing a company’s debts under Chapter 11 can be an effective way to reduce the company’s debt load and preserve its viability as a going concern. There are several ways to approach the reorganization process under Chapter 11, and by thinking strategically about the opportunities that are available, company executives can maximize the benefits of investing in a Chapter 11 filing while also mitigating the potential risks involved. Keep reading to learn more from an experienced Miami business bankruptcy attorney at Edelboim Lieberman.
5 Key Strategic Considerations for Companies Considering a Chapter 11 Bankruptcy
From deciding whether to file at all to deciding how to deal with the company’s creditors during the process, there are several strategic considerations involved in seeking to reorganize a company’s debts under Chapter 11. Here are five key examples:
1. Filing Promptly to Avoid (or Pause) Collection Activities Can Mitigate the Company’s Litigation Risk
When contemplating a Chapter 11 filing, informed decision-making is essential. There are a variety of potential alternatives available; and, if pursuing one of these alternatives makes sense—even as a temporary measure in the short-term—it will be important not to rush into the bankruptcy process.
At the same time, however, there can be benefits to initiating a Chapter 11 bankruptcy promptly. This is especially true for companies that are at imminent risk of facing collection action (or that are facing collection action already). Most significantly, initiating a Chapter 11 case triggers the automatic stay under the U.S. Bankruptcy Code. Once the automatic stay has been triggered, creditors are generally barred from pursuing collection action for the remainder of the bankruptcy process—and they must have specific grounds to seek relief from the automatic stay in court.
2. Streamlining the Process Will Reduce the Costs (and Risks) Involved
Most financially distressed companies will benefit from streamlining the Chapter 11 bankruptcy process, as this will reduce both the costs and the risks involved. There are a variety of steps that companies can take to ensure that the process is as efficient as possible.
One of these steps is to initiate their Chapter 11 filing under subchapter V. Under subchapter V, companies that have less than $7.5 million in debt are eligible to pursue a streamlined process that helps to facilitate a favorable resolution while also limiting the options that creditors have to intervene along the way. If your company is eligible to file under subchapter V—and if reorganizing your company’s debts through bankruptcy makes sense under the circumstances at hand—this could be the best option your company has available.
Another way that companies can often streamline the Chapter 11 process is by filing what are commonly referred to as “first day motions.” Companies can use first day motions to secure court approval for things like seeking debtor-in-possession (DIP) financing, paying employment-related expenses and paying critical vendors—which might otherwise lead to disputes with the company’s creditors later in the process. As their name suggests, there are time sensitivities involved with leveraging “first day motions,” so an informed and proactive approach is essential for making strategic decisions.
3. Submitting a Proposed Reorganization Plan at the Time of Filing Can Improve the Chances of Securing Confirmation Without Creditor Intervention
Companies have the option of submitting a proposed reorganization plan in traditional Chapter 11 bankruptcy cases, and, in subchapter V cases, they are generally required to submit a proposed reorganization plan within 90 days of filing their bankruptcy petition. In both types of cases, however, there can be strategic benefits to submitting a proposed reorganization plan at the time of filing.
Among other things, submitting a proposed reorganization plan at the time of filing can help avoid unnecessary delays. It can also make the company’s intentions clear from the outset, and this can often help to facilitate favorable negotiations when necessary. Submitting a proposed reorganization plan at the time of filing also prevents the company’s creditors from developing a competing plan first (which is a possibility in traditional Chapter 11 cases), and this can help to streamline the business bankruptcy process as well.
4. A Cramdown Can Be an Effective Strategy in the Right Circumstances
When submitting a traditional filing under Chapter 11, financially distressed companies have the option of pursuing what is commonly referred to as a “cramdown” bankruptcy. This allows them to secure court approval for their proposed reorganization plans without their creditors being on board.
The U.S. Bankruptcy Code includes specific provisions for pursuing a “cramdown” in a Chapter 11 bankruptcy case, and when pursuing a “cramdown,” companies will need to prepare their filings with these specific provisions in mind. When a “cramdown” bankruptcy makes sense—and when companies work with their Miami business bankruptcy attorney to plan ahead as necessary—this can be a highly strategic and cost-effective solution.
5. Working Proactively with the Company’s Creditors Can Also Be an Effective Strategy in the Right Circumstances
While pursuing a “cramdown” bankruptcy will make sense in some cases, a more creditor-friendly approach will make sense in others. It is also worth noting that “cramdowns” generally are not necessary in subchapter V cases, as creditors do not have the option to submit a competing reorganization plan.
Even when a company meets the requirements for securing court approval of a “cramdown,” this doesn’t necessarily mean that its creditors will simply go along. “Cramdowns” can lead to litigation in some cases, and they can also jeopardize commercial relationships that are necessary for the future. With this in mind, in some scenarios, working proactively with the company’s creditors will be the more strategic approach—and it will also prove to be the most cost-effective in the long run.
Schedule a Free and Confidential Consultation with a Miami Business Bankruptcy Attorney
If you would like more information about the strategic considerations involved in pursuing reorganization under Chapter 11, we invite you to get in touch. To schedule a free and confidential consultation with an experienced Miami business bankruptcy attorney at Edelboim Lieberman, please call 305-768-9909 or contact us online today.
