What is Chapter 11 and when is it the right solution?
Chapter 11 is the form of bankruptcy also commonly referred to as the “reorganization bankruptcy”. It can be filed by individuals, but is most commonly used by business entities.
Why do most Chapter 11’s fail?
Circumstances that can lead to Chapter 11 are: lawsuits that end badly, loans that mature or are accelerated due to a default, economic downturn, unanticipated competition, excessive or unexpected debts, infighting, poor marketing and sometimes, bad management. The good news is that Chapter 11 can often fix those problems, but it requires careful planning and deft hands. Most do not succeed primarily because the lawyer who filed it did not undertake enough pre-filing analysis and “game planning”; the cases did not have enough of the ingredients necessary to succeed in the first place, and should never have been filed. If you are considering to do this, you should ask your lawyer about their process of evaluating the case and the potential exit strategy. If the lawyer is not going to drill down and look at financials, and evaluate the nature of the debts, there is no way he or can she can conjure an exit scenario. You should be able to fully understand how the case is likely to end before it is filed; if the lawyer does not clearly explain how your facts and figures will lead to a successful outcome, then it is likely they are “winging it”. These are expensive cases to be filing on a wing and prayer, and you should think long and hard before signing up for one. Ask yourself: Does the lawyer understand exactly how my business works? Did the lawyer look at my loan documents, and lawsuit pleadings? Did he or she study my financials? Did the lawyer then give me a spreadsheet showing the probable outcomes of my case? Did the lawyer explain how the Chapter 11 unfolds, and what tools are available to modify debts? Did the lawyer explain the problems that can arise, and the likelihood of overcoming those problems?
Are you willing to go the extra mile?
Another element of Chapter 11 is the amount of effort you will have to expend as the business owner to assist your lawyer in the process. Many potential business bankruptcy clients are already having a difficult time managing their business. This now adds a new full time job to their daily grind. The investment of time and energy that management must devote to the process is substantial. The lawyer is the guide or conductor–the real work is in the trenches and must be done by the officers and managers. If you are not willing to add working hours to your day, you are not a good candidate for Chapter 11.
The two most important words: Exit. Strategy.
Too often these cases fail, and a primary cause of failure is inadequate preparation; a failure to do the homework and to ‘roadmap’ an exit strategy up front. Pre-filing analysis is, in my opinion, the secret to successful outcomes in Chapter 11. Benchmarks and waypoints along the way should be plotted, and the expectations monitored to compare with projections as the case unfolds. The lawyer who is first pondering the reorganization plan as the case unwinds will rarely be steering their client into a safe harbor.
How do you find the right lawyer?
Experience, credentials, and track record are keys. The prospective Chapter 11 client should ask how many cases the lawyer has filed and what percentage of cases have been successfully confirmed. They should talk to other clients of the lawyer who have gone through the process. Most importantly, they should find out if their lawyer is board certified in business bankruptcy. You can find a list of a nationally certified Business bankruptcy lawyers at www.abiworld.org.