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Three alternatives to business bankruptcy

by | Apr 28, 2021 | Corporate Bankruptcy & Restructuring

Business owners struggling with insolvency may wish to avoid bankruptcy. Although bankruptcy can provide a fresh financial start through a sale, liquidation or restructuring, it is not the right option for every business.  In some cases, one of these other restructuring options may work best.

Option #1: Changes to the operational structure of the business

Arguably the easiest and first step, this option involves an internal audit to determine what is going wrong within the business.  In some cases, the audit may result in the finding of expenses that can be cut to help the business reduce costs.  In others, the business may need to find a way to increase sales or obtain additional funding.  Often, business owners bring in financial advisors to help navigate an operational restructuring to find the correct solution for their business.

Option #2: Workout

A workout involves business owners attempting to navigate the financial issues with the creditor or creditors out of court.  This option generally uses an ability to pay analysis to convince creditors to extend payment deadlines or to voluntarily reduce the amounts owed.  A creditor may agree to rework payment terms or amounts due if the business can provide a promise of payment from future cash flows, an infusion of equity or refinancing. It is important to come up with a viable plan to present creditors to ensure a global agreement.  Most successful workouts require the agreement of all creditors.  A failure to obtain an agreement with all creditors can leave the business open to future financial problems.  If a business cannot obtain agreement form most or all of its creditors, it may be best to consider other options, including an assignment for the benefit of creditors or bankruptcy.

Option #3: Assignment for Benefit of Creditors

An assignment has a lot in common with bankruptcy, with a couple of key differences.  Instead of using the federal court system, an assignment generally uses a trust and is overseen by a state court.  Upon agreement by the board of directors and shareholders, the business essentially transfers its assets into a trust. The exact process is governed by state law and, as such, can vary depending on which state the business is located.  However, it generally moves forward in a process similar to a Chapter 7 liquidation bankruptcy case, although without the benefit of the automatic stay to halt ongoing litigation.  

These are just a few of the options that can serve as an alternative to bankruptcy.  Businesses looking to restructure and set themselves up for future success should consider these and other options to help better ensure their business can move forward after dealing with financial difficulties.