Deciding Between Bankruptcy & A Workout

Trying to decide whether to file for bankruptcy or attempt to negotiate an out of court “workout” could have been the situation the person who coined the term “stuck between a rock and a hard place” was in. There is no right answer when one is in such a position, and moving forward is guaranteed to be painful.

Let’s Back Up A Minute

Many people think that declaring bankruptcy is the only way to get out of a tough financial situation, but that is simply not the case. Many businesses are able to avoid bankruptcy by negotiating new deals with their existing creditors. The renegotiated deal is called a workout.

Creditors are often willing to enter into a workout agreement because they know that the alternative is having a debtor file for bankruptcy. In the post-financial crisis world, lenders and other creditors (like suppliers) are very familiar with bankruptcies. They know that having just one business in a chain of production file for bankruptcy can bring down a larger group of businesses connected to it, or even a whole industry. These creditors don’t want to risk the health of their own business or industry, so they are willing to be flexible.

Pros and Cons of a Workout

A workout can be a great solution, because they can be done quickly, cheaply, and discretely. But they are not the right choice for every business.

In order for a workout to provide long-term relief, the business must have enough cash flow to keep the business running in the short-term, and a plan to pay back debts in the long-term. Simply pushing bankruptcy off to a later date does not serve the interests of any of the parties involved, and is not what a successful workout should do.

The business must also have a really good understanding of what debts are currently owed, and what is coming due in the future. Once again, delaying an inevitable bankruptcy is not what a workout is for.

Pros and Cons of Filing for Bankruptcy

If a debtor lacks liquidity, or has a lot of creditors, filing for bankruptcy may be a more realistic path forward. Bankruptcies are disruptive, but what happens after an initial filing is relatively predictable, making it easy for the debtor and all the creditors to move forward.

From the debtor’s point of view, filing for bankruptcy provides a bit of breathing room that can be used to get back on one’s feet since creditors cannot collect any debts after a filing until the court gives the okay.

Bankruptcies are known for their ability to give debtors a clean slate, but they can also be good for creditors and those looking to buy business assets at a lower cost. Filing for bankruptcy removes liens and other on a debtor’s assets, making them attractive to buyers.

Bankruptcies are by their very nature transformative experiences. The business that goes into bankruptcy is never the same business than emerges.

There Is No Right Answer

When a business is in dire financial straits, it is very unlikely that a clear path forward that has no downsides will magically appear. Oftentimes none of the options available are great. With good advice, sound planning, and a bit of luck, whatever path a business owner chooses will lead in a good direction.  

The Other Side of the Story

There are two sides to every story, including those involving bankruptcy. We talk a lot about the work we do for those who are filing for bankruptcy, but we also do quite a bit of work for creditors. In fact, we should probably talk more about this work because we think it is one of the things that makes us one of the best bankruptcy firms in Wisconsin. Working on both sides of the bankruptcy process means we can be better advocates for our clients because we know the other side of the story.

Our Work for Commercial Lenders

Our firm does a lot of work for commercial lenders. We review contracts to make sure that investments will not be completely lost if a deal goes bad, and we help lenders navigate the bankruptcy process when they are owed money by a debtor that has filed for bankruptcy protection.

When one person or business files for bankruptcy it can set off a chain reaction that destabilizes many businesses. We try to minimize the impact a bankruptcy filing has on our clients by encouraging them to make sure that all the loans they make are secured, even if the applicable collateral is unusual.

We also negotiate a lot of workouts. A workout is essentially a renegotiation of an outstanding debt. Being flexible about when payments are due or what interest rate is being charged can help keep a business partner afloat. It is much better to take a small loss than to drive someone into bankruptcy and risk that their bankruptcy will cause your business financial problems.

The Other Side of the V

Another service we provide creditors is representation during bankruptcy proceedings.

In order to preserve a debt owed by someone that has filed for bankruptcy, a creditor must file an adversary matter with the court. Filing an adversary matter puts the court and the debtor on notice that the creditor wants to be paid back. Sometimes these matters involve situations where the debtor has transferred assets to a third party (like a family member) in order to try and preserve the asset.

Having a customer that files for bankruptcy can be a problem even if they have already paid you back because the court may pull payments that were made during the 90 days before the bankruptcy filing back into the bankruptcy estate. The process of pulling paid debts back into the bankruptcy estate is known as a preference action, and there are several defenses to it. The most effective way to fight a preference action is before it occurs, so as soon as you get word that a current or former client has filed for bankruptcy, it is wise to speak with a bankruptcy attorney that has experience working for creditors.

Shape the Story

The radio commentator Paul Harvey used to conclude his broadcast by telling his listeners that they now knew “the rest of the story.” Knowing how a story usually goes, and what the viewpoints of different characters are, makes it easy to predict the ending. Our firm is good at helping our clients tell their side of the story and get the ending they want.