In its most basic form, a Chapter 11 bankruptcy petition allows a business to restructure its debt. This can result in a greater cash flow and help the business regroup, ultimately putting it into a situation where it can move forward instead of remaining stagnant and possibly collapsing under the pressure of insurmountable debt.
Hertz Global Holdings, widely known for its car rental services, provides an example. This business has struggled in recent months. The pandemic has put its typical operations under strain. Many businesses throughout the country can relate to this situation. Without its typical inflow of customers, it has been unable to keep up with its financial obligations. In an effort to remain solvent, it has decided to enter into a Chapter 11 reorganization plan.
As part of its proposed plan, Hertz would receive over $4 billion in investment funds in exchange for providing investors with a majority, and up to 100%, of common stock in the new company.
How does a Chapter 11 help? Why can’t business owners just reorganize their debt on their own?
One of the key benefits of a successful petition for relief through a Chapter 11 bankruptcy is the “cram down” provision. This provision, present in Section 1129(b) of the bankruptcy code, gives bankruptcy court power over lenders. Lenders that may otherwise deny a business’ refinancing proposal are required to accept all those which are “fair and equitable.”
Examples could include lower interest rates or an extended maturity date for the loan in question. This flexibility gives the business a higher likelihood of moving forward with its financial obligations in a more manageable way.
How does a Chapter 11 result in funds for the business?
This process can lead to investor funds, as noted in the Hertz example above. This is just one way the process can lead to funds. Another option is to replace any existing secured debt with a new lender. The approved reorganization plan can make the business more lucrative to lenders. It is important for business leaders who are considering a Chapter 11 reorganization plan to review the benefits and risks of these and other options to better ensure they move forward with the plan that is best for their business interests.
It is important to note that as of the writing of this post, the Hertz plan was not yet approved by the court and required the business meet multiple conditions before it could move forward. Regardless, the example provides a valuable look into the concept of the potential benefits of a Chapter 11 plan.