Success Strategies For Chapter 11 Business Reorganizations: Plan To Get In and Get Out!

Guest author, Steven Fox, has practiced bankruptcy law since the late 1980′s and has offices in the Los Angeles area. He has a solid understanding of how businesses work and provides good counsel for troubled individual and business debtors. His clients include manufacturing companies in a wide range of industries, retail stores and individuals.

Do you believe that you or your business may need to file for a Chapter 11 “Reorganization”? Do you know the single most important strategy for success in Chapter 11? Most troubled business owners don’t because, as you’ll see below, most Chapter 11 cases fail. If you want your case to succeed, you’ll need an effective exit strategy. And you’ll need to develop this strategy with your attorney before you file your case with the Chapter 11 goal of getting in and getting out!

I’ll share with you some basic information about Chapter 11 and some statistics that may shock you. And they should. Then I’ll review some of the elements that experienced Chapter 11 attorneys look for in planning successful business reorganizations or individual debt restructures.

First, some Chapter 11 basics. A Chapter 11 is a reorganization case, generally for business but also for individuals. There is a filing fee, a lot of paperwork and motions which need to be filed, followed fairly quickly by the filing of the reorganization “plan”. The plan explains how creditors will be paid (the sources of funding and the timing of payments) and how much they are to be paid. Creditors get to vote to accept or to reject the plan. Creditors can object to confirmation of the plan and the bankruptcy court may “confirm” the plan, in effect, creating a new contract between the debtor and creditors.

If the plan is approved, the debtor makes payments to creditors usually for a period of years and the debtor gets a discharge of debts. If the plan is not approved, the case could be dismissed or converted to a Chapter 7 liquidation case. In a Chapter 11 case and a plan, liens may be removed; loan payments and interest rates can be reduced. Lawsuits and collection activities generally stop. Non-dischargeable debts, such as certain taxes and unpaid child support, can be paid over time through the plan.

Now, here is the cautionary tale of Chapter 11 statistics. Most Chapter 11 cases fail. About 70% of the Chapter 11 cases filed between 1989 and 1995 were either dismissed or converted to Chapter 7, according to a study done for the Executive Office of the United States Trustees. This study found that only 26% of the Chapter 11 filings during that same period resulted in a confirmed reorganization plan.

Since the 2005 amendments to the Bankruptcy Code, similar U.S. Trustee statistics show that 33% of Chapter 11 cases resulted in a confirmed plan of reorganization (through February 2009). See “Chapter 11 Filing Trends in History and Today”, Flynn, Crewson, Et. al., (2010).

"Each Chapter 11 will have its own exit strategy."

Of course, a strategy is not a guaranty of a successful case but it allows the attorney, the debtor and others to work toward the same goal. Each Chapter 11 will have its own exit strategy.

In my experience, there are many reasons why certain cases succeed, largely due to the planning done in advance. Many failed cases were just not appropriate for Chapter 11 in the first place. Your successful exit strategy must be developed before your case begins or your case will be one of the two-thirds or so that fails.

In developing an exit strategy, you’ll want your attorney to be highly experienced in successful cases and to consider many important factors leading to success. So it is absolutely essential that you choose the right attorney.

We know that your goal is to “get in and get out” by planning your case in advance. So what are some common parts of an effective exit strategy?

• Be prepared to make hard choices in your business—choices that will hurt a lot but which will allow you to confirm a fair reorganization plan.
• Get your books and records in order before the case is filed. Accurate information and accurate reporting during your case will be critical.
• Prepare for emotional stress. Leading a business through Chapter 11 will add new emotional stresses and challenges.
• Do not hedge in making accurate and complete financial disclosure.
• Plan for professional costs. Typically the Debtor needs to employ both an attorney and an accountant. Knowing how you will pay these professionals is a strong indicator of success.
• Identify likely problem creditors and anticipate their legal and factual arguments. Plan to counter their facts and arguments and expect to negotiate where possible to reach a deal with these creditors.

The planning you do with your attorney and accountant in advance should give you a strong feeling that you will succeed in the Chapter 11 reorganization process. If not, expect that an experienced Chapter 11 attorney will tell you that you and your business are not well suited to reorganize in Chapter 11.

If you are thinking of filing a Chapter 11 case in the Los Angeles area, I maintain an office in Encino, California and can be reached at (818) 774-3545.  As you might expect, I am prepared to evaluate your case for success and to answer your questions without hesitation. Don’t just call the lawyer who filed your friend’s Chapter 7 case. Seek out an experienced Chapter 11 lawyer that understands what will make your reorganization a success.