Can I Save My Company Through Bankruptcy?
You have worked for ten years building up your small company. Your company’s annual revenue was in the millions of dollars but now, with natural gas prices down, it has fallen off a cliff. Your bank still wants the same monthly payments, your employees want their paychecks and the IRS wants payroll taxes. You are on the verge of losing everything you have worked so hard for.
What can you do? It may be possible to use chapter 11 of the Bankruptcy Code to reduce your company’s debt, make reduced payments over five years and have your company emerge stronger post-bankruptcy.
Chapter 11 bankruptcies are shrouded in complexity, but the basic idea is simple: if your company has a steady cash flow and some assets, you can, under certain circumstances, “cram down” the creditors so that the company’s debt is reduced to the value of its assets. This “cram down” works under the bankruptcy code because, if you just go out of business, the most that your creditors would get is the value of your assets. Thus, creditors are better off to let the company survive so that it can generate some cash to pay a percentage of the unsecured debt (say 15 cents on the dollar) instead of simply selling the assets at a fire sale where unsecured creditors often get nothing. Because 15 cents is more than zero, the bankruptcy court will approve a well-crafted chapter 11 plan of reorganization because it is in the “best interest of the creditors.”
Chapter 11 is no walk in the park, however. It will not work if your company has already lost most of its customers or assets, because there is then nothing to reorganize. Likewise, if your business is a “single asset real estate entity” (such as a hotel or real estate subdivision), the law forces you to pay the bank 100 cents on the dollar, making chapter 11 unattractive.
There is another provision of chapter 11 that you need to be aware of before taking the plunge, called the “absolute priority rule.” Under this rule, if your chapter 11 plan proposal is to pay your unsecured debt at less than 100 cents on the dollar (which is the point of filing bankruptcy), then your ownership interest will be extinguished.
You might ask, “If I am going to lose all my ownership in my own company, what is the purpose in filing chapter 11?” The answer is called “new value.” While your old shares of the company will be canceled, you can buy shares of the new company. You then become the sole owner of the newly reorganized company that has the same name, same customers and same assets. If you are a personal guarantor on the company’s debt that you are seeking to “cram down”, then you will likely need to find an angel investor to buy shares of the new company as it emerges from chapter 11. Otherwise, the bank can seize your new shares that you own personally, which would defeat the purpose.
If you can jump through all these hoops, then you can pare down your company’s debt to the value of its assets and have the new, leaner company emerge stronger over the long run.
We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code.[wpfblikebox]