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Using Commercial Workouts as an Alternative to Bankruptcy

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Using Commercial Workouts as an Alternative to Bankruptcy

When a business finds itself in financial trouble, it frequently will reach out to creditors in order to negotiate payment plans or make other arrangements in order to remain a going concern while attempting to stabilize income and expenses. Therefore, many creditors learn that there are financial problems before the business has had to take the step of filing for bankruptcy. This may be a good time to consult with experienced bankruptcy attorneys in order to develop an alternative course of action that will save the time and money of a bankruptcy if the circumstances support this action. This alternative to bankruptcy may take the form of a commercial workout.

A business that is in fiscal jeopardy, but which has creditors willing to work with it to find solutions, may be able to organize a commercial workout that will benefit everyone. It is important to keep in mind that a commercial workout is a voluntary action that does not involve the court system. This process only will work if the business has the assets and income to continue as a going concern. A business that lacks the resources to pay off existing debt and meet future obligations merely is going to spin its wheels in a workout. In addition, all the creditors must be willing to pursue this remedy. If one or two refuse, the business may be forced to file for bankruptcy.

When evaluating whether a workout is a viable solution, creditors should consider:

  • Does the business have an anticipated positive cash flow – future income must be enough to satisfy ongoing expenses while satisfying payment plans on delinquent debt;
  • Does the business have the possibility of new funding from a lender – a creditor willing to invest in a business may make all the difference in the viability of the company as an ongoing concern. This is a critical point for the business to create a compelling argument why a new lender would want to invest in a company that is facing the possibility of insolvency;
  • Is there an investor who sees the potential of the business – many times, a business has a strong strategic plan, but hits some unexpected bumps for which it was unprepared. An investor who recognizes the long-term potential of a business can creates assurances for the creditors that will bring everyone to the table to effectuate a productive workout.

When the business leaders do not see the benefit of a workout, they may simply file a Chapter 7 action to liquidate the assets of the business and satisfy any outstanding debts to the extent possible. However, when the management team and the creditors do believe that the business has the foundation to ultimately thrive, a commercial workout may preserve more assets than a Chapter 11 reorganization. Of course, the business needs to be willing to put the effort into the plan, including through the drafting of a restructuring agreement that is able to satisfy the outstanding questions of the creditors about the resources available going forward. The plan needs to take into account all the financial assets and liabilities of the business, as well as the projected cash flow, profit and loss statements, and the bottom line on the balance sheet. When this comprehensive plan indicates that there is enough cash flow to continue the operations of the company while satisfying past debt, the workout might be the best option for everyone.

At the Law Offices of Georgette Miller & Associates, P.C., our attorneys are focused on the best interests of our clients, whether that is the business considering the possibility of bankruptcy or the creditors who are trying to recoup their financial losses to the extent possible. Although we are experienced in pursuing bankruptcy actions, we also understand the benefit of alternatives and will work to find the right solutions for each client. With offices in New York, New Jersey, Pennsylvania, Delaware, Maryland, and the Metro Washington, D.C. area, we are ready to handle matters for clients throughout the Northeast and Mid-Atlantic regions. Call us at 1-866-964-6529 ((866) 964-6529) to schedule a time to talk.