Workout to Avoid Bankruptcy

In these difficult times of economic uncertainty, we are repeatedly asked by individuals, "Is there anything which I can do personally or for my business other than to file for bankruptcy?" The answer is, yes, but out of court restructuring and liquidations are not as procedurally easy as preparing and filing a bankruptcy petition. There is no workout code or statute. There are no rules except for the parameters established by contract law, debtor-creditor law, landlord-tenant law, accounting principles and the creativity of the parties.

The first step is to determine whether the workout is to be a restructuring of the debts of an ongoing business or an orderly liquidation of a business which needs to be closed.

Out of court restructuring workouts are an option in situations where:

1. There is still a working relationship with lenders.

2. There are still current active customer accounts.

3. There is a steady, consistent cash flow.

The restructuring workout usually requires the negotiation of a forbearance or standstill agreement with lenders in order to avoid foreclosure, to obtain a renewal or extension of a loan and to give the debtor temporary relief from payments. A cash flow projection and budget are part of the process and are also necessary for the restructuring of vendor and supplier payments.

If an orderly liquidation is required in order to maximize recovery for creditors and limit guarantor liability, an Assignment For the Benefit of Creditors ("ABC") may be the right choice. An ABC is accomplished by the business entity assigning its assets to a third party fiduciary, the Assignor who is responsible for selling the assets and distributing funds to creditors. An ABC can be an effective option where:

1. Debtor has an interested buyer who wants business as a going concern, who wants to buy assets, not stock, doesn't want to take on all of the debt and wants an assurance of clear title to assets.

2. Principals of the debtor feel it is a viable business if can eliminate a large portion of the unsecured debt and so a new company is formed to buy the assets and assume limited debt from the Assignee.

Pros:

1. No court supervision.

2. Faster and cheaper than bankruptcy.

3. Can sell business as going concern.

4. No preferential transfer issues.

Cons:

1. Have to work out voluntary deal with lienholders and lessors.

2. Shareholders are not eliminated by federal law or court order.

3. No statutory stay on litigation.

4. No easy means of recovery from third parties.

As can be seen from this comparison, workouts are not the easy answer for everyone and whether a workout will work for you depends upon your particular situation and problems.