Bankruptcy – and the restructuring process – are challenging and complex endeavors, requiring a variety of tactics and resolution mechanisms. For the parties involved, financial expectations can be at odds with the reality of the situation, and knowing when to compromise and how best to proceed for your organization’s specific needs is essential.
Due to some of the significantly disruptive trends of the last couple of years, including pandemic-related challenges, international conflicts and unrest, supply chain issues and more, the number of Chapter 11 bankruptcy filings has dramatically increased.
The below listed questions were originally produced and published by the L.A. Times B2B Publishing Team. The full roundtable feature can be accessed here.
Q: Are there any new laws and regulations to be aware of that affect the bankruptcy and restructuring landscape in 2022?
Banner: The talk of the bankruptcy world lately has been the “subchapter v” bankruptcy process – which is a form of “mini-chapter 11" aimed at making chapter 11 reorganization an affordable option for small and mid-sized businesses. The subchapter v process was created under the 2019 Small Business Reorganization Act (SBRA) to help streamline the costly chapter 11 process, reduce the likelihood of litigation with creditors and provide principals the opportunity to retain their equity even if creditors are not paid in full. The original SBRA only allowed the smallest of small businesses to participate – those with debts not exceeding $2,725,625. As such, a small business with a $2-million line of credit and $1 million in trade debt would be locked out from the “mini-chapter 11" process. Congress thankfully extended the debt limit during the COVID pandemic to $7.5 million, an increase that has only recently been extended until 2024. With the new “mini-chapter 11" process, reorganization is a viable option for more small and mid-sized companies.
Q: At what point 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 at the time when a company is beyond the proverbial “point of no return” and has no choice but to file a bankruptcy; at which point it may be too late to avail itself of certain benefits of the bankruptcy code or successfully restructure. Just as bankruptcy is a last resort for a company, the filing of a bankruptcy is typically viewed as the last option for a bankruptcy professional. On the slow path to bankruptcy, a company’s non-bankruptcy options become more limited until they are left with no other option. The earlier we are engaged, the more tools a bankruptcy professional has in their toolkit to help a company avoid bankruptcy.
Q: If the business is privately held, will a business bankruptcy hurt the owner’s credit score?
Banner: The short answer is “no.” A company’s bankruptcy filing should not affect a principal’s credit. However, if the principal’s personal financial affairs become intertwined with the company’s, there is a possibility of an adverse credit event. For instance, company credit cards are a common way that company debts make their way to an individual’s credit report. If a company credit card has your name on it, you should be concerned about personal liability. Also, principals often guarantee the debts of a company, which could lead to collection and lawsuits after the underlying company files bankruptcy. Any time you take on debt for the company, you should consider what will happen if the company later files for bankruptcy.
Q: What are some 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 company is liquidated through an assignee, or a receivership, an in-court process where a company’s assets are liquidated through a court-appointed receiver. Though each may have its advantages in certain situations, my favorite “alternative” is an informal restructure through stakeholder negotiations. More often than not, the source of a company’s financial distress is derived from a single source – their main supplier; a bank loan they have fallen behind on; a landlord that’s losing its patience; or perhaps a group of creditors that have been knocking on the door. Although negotiations with such parties can sometimes be difficult, the disgruntled creditor often understands that a failure to reach a negotiated resolution could lead the company into bankruptcy – a bad result for everyone.