Planning Exit Strategies Before Filing a Chapter 11

Entering into agreements with key creditor groups before filing a Chapter 11 bankruptcy can be of great advantage for a business debtor, especially a smaller company that is more likely to be impacted by the costs of a bankruptcy. This prearranged approach is often memorialized in a restructuring support agreement (RSA), a contract that outlines the terms and conditions for the resolution of the Chapter 11 case.

By negotiating a restructuring support agreement, the debtor gains a significant degree of control over the bankruptcy process. The RSA serves as a roadmap for resolving the debtor’s financial issues. This can instill confidence in creditors, employees, and customers, as they can see a defined path for the company’s reorganization and emergence from Chapter 11. The prearranged plan allows for a more efficient and expedited bankruptcy process, which can minimize the time spent in Chapter 11 and bring about a quicker return to normal business operations. A faster and more efficient bankruptcy process often translates to reduced legal and administrative costs.

Possible exit strategies for prospective Chapter 11 debtors include the following:

1. Debt restructuring — This strategy typically involves negotiating with creditors to modify the terms of loans, extend maturities or reduce the overall debt burden.
2. Asset sales — Selling non-core or underperforming assets can generate funds to repay creditors. This strategy can help the debtor to focus on its core business and emerge from Chapter 11 with a more streamlined and sustainable operation.
3. Equity infusion — Bringing in new equity capital can improve the debtor’s financial position and provide the necessary funding for the reorganized company to thrive post-bankruptcy.
4. Equity-for-debt swaps — Converting a portion of the debtor’s debt into equity can be an attractive option for both the debtor and creditors. This allows creditors to become equity holders in the reorganized company, aligning their interests with the success of the business.
5. Sale of the entire business — In some cases, a debtor may explore the possibility of selling the entire business as a going concern. This can be a viable option if there is a buyer interested in acquiring the business as a whole.
6. Liquidation — In this scenario, which is usually the one of last resort, the debtor sells off its assets to repay creditors and the business ceases to exist.

Prospective Chapter 11 debtors should carefully evaluate these exit strategies in light of their specific circumstances, their ability to obtain debtor-in-possession (DIP) financing and the preferences of key creditors. Engaging in early and transparent discussions with creditors can set the stage for a more successful Chapter 11 reorganization.

The Law Offices of Michael Jay Berger in Beverly Hills represents California businesses in Chapter 11 bankruptcy proceedings. To schedule a free consultation, call 310-271-6223 or contact me online today.