Bankruptcy – and the restructuring process – are difficult and complex undertakings, requiring a variety of resolution tactics and mechanisms. For parties involved, financial expectations can be at odds with the reality of the situation, and knowing when to compromise and how to best proceed for your organization’s specific needs is critical.
Due to some of the significantly disruptive trends of the past two years, including pandemic-related challenges, international conflicts and unrest, supply chain issues, etc., the number of Chapter 11 bankruptcy filings has increased considerably.
The questions below were originally produced and published by the LA Times B2B Publishing Team. The full functionality of the round table is accessible here.
Q: Are there any new laws and regulations to be aware of that affect the bankruptcy and restructuring landscape in 2022?
Banner: The bankruptcy world has recently been talking about the “sub-chapter v” bankruptcy process – which is a form of “mini-chapter 11” aimed at making a chapter 11 reorganization an affordable option for small and medium-sized businesses. The Subchapter V process was created under the Small Business Reorganization Act (SBRA) of 2019 to help streamline the costly Chapter 11 process, reduce the likelihood of creditor disputes, and provide principals with the opportunity retain their capital even if creditors are not fully paid. the smallest of the small businesses to participate – those with debts not exceeding $2,725,625. Thus, a small business with a $2 million line of credit and $1 million in commercial debt would be excluded from the “mini-chapter 11” process. Congress fortunately extended the debt limit during the COVID pandemic to $7.5 million, an increase that was only recently extended through 2024. With the new “mini-Chapter 11” process, the reorganization is a viable option for more small and medium-sized businesses.
Q: When should a business consider hiring a bankruptcy or restructuring professional?
Banner: The short answer is “at the first signs of financial distress”. A common misconception is that a bankruptcy professional is only needed when a business is past the proverbial “point of no return” and has no choice but to file for bankruptcy; at that time, it may be too late to take advantage of certain advantages of the bankruptcy code or to successfully restructure. Just as bankruptcy is a last resort for a business, filing for bankruptcy is generally considered the last option for a bankruptcy professional. On the slow road to bankruptcy, a company‘s non-bankruptcy options become more limited until they have no other option left. The earlier we engage, the more tools a bankruptcy professional has in their toolbox to help a business avoid bankruptcy.
Q: If the business is privately held, will a business bankruptcy affect the owner’s credit rating?
Banner: The short answer is no.” A business filing for bankruptcy should not affect a principal’s credit. However, if the principal’s personal financial affairs become intertwined with those of the business, there is a risk of adverse credit event. For example, corporate credit cards are a common way that corporate debts end up on an individual’s credit report. If a corporate credit card is in your name , you should be concerned about your personal liability.In addition, principals often guarantee the debts of a company, which could lead to collection and lawsuits after the underlying company goes bankrupt. debt for the business, you must be wondering what will happen if the business later files for bankruptcy.
Q: What are viable alternatives to bankruptcy?
Banner: In California, there are formal alternatives to bankruptcy, such as an assignment for the benefit of creditors (ABC), an out-of-court process where a business is liquidated through an assignee, or a receivership, a court-ordered process where a company’s assets are liquidated through a court-appointed receiver. While each may have its advantages in certain situations, my preferred “alternative” is informal restructuring through stakeholder negotiations. More often than not, the source of a company’s financial difficulties stems from a single source – its main supplier; a bank loan on which they fell behind; an owner who loses patience; or maybe a group of creditors knocking on the door. Although negotiations with these parties can sometimes be difficult, the disgruntled creditor often understands that a failure to reach a negotiated resolution could put the company out of business – a bad outcome for everyone.