A Bankruptcy Alternative That Really Works

The only successful bankruptcy proceedings that I have seen are the prepackaged Chapter 11 type, which are rarely done with small businesses. With the secured parties (the banks) on board, agreeing to a specific plan and possibly even extending more credit, lending to fund the defaulting borrower’s emergence out of the Chapter 11 filing, a plan will then work out well with the secured bank’s cooperation. The non-prepackaged Chapter 11 filing will immediately subject the defaulting borrower filing the Chapter 11 to a motion from the secured bank to lift the stay so they can sue and liquidate their collateral. Under most circumstances this motion will be granted, ending the life of the Chapter 11 business.

The conversion rate of a Chapter 11 to a liquidating Chapter 7 is extremely high, above the 90% level, so what’s the point? You will lose it all and at great expense unless you have arranged a prepackaged Chapter 11 with the secured parties on board and in agreement, and frequently, funding the emergence. For everyone else it’s likely to be a total loss of the business. Yes, the debts are also wiped out, that’s the deal. Lose the assets but lose the debt. Sometimes that’s OK, but not if the basic core business is viable. In that case the workout is the best path as in most circumstances that preserves the business.

Workouts preserve assets, bankruptcies liquidate assets. That’s the lesson. Both are viable strategies when the circumstances are appropriate.