How a Corporate Bankruptcy Attorney can Help Your Business Avoid Bankruptcy

Bankruptcy is an option that no business wants to contemplate. However, when a business is struggling, failing to consider bankruptcy soon enough often serves to hasten its arrival. Putting bankruptcy on the table as a strategic option can have the opposite effect—it can help a business avoid bankruptcy altogether. When experiencing  financial and/or operational distress, an experienced bankruptcy attorney can help your business realize many of the benefits of bankruptcy—reduced debt, streamlined operations—without the expense, time investment, and potential loss of control that comes with a Chapter 11 filing.

Many businesses have filed for bankruptcy this year. Through October, according to the American Bankruptcy Institute, approximately 28,000 commercial bankruptcies have been filed in 2020. That’s an average of over 130 commercial filings every day.

But 28,000 commercial bankruptcies is a relative drop in the bucket when you consider the full scope of the economy. Instead of filing for bankruptcy, many businesses have simply closed down this year. According to Yelp’s Local Economic Impact Report, approximately 100,000 businesses closed as of September, and that only reflects the limited data set of businesses within Yelp’s network.

Despite changes made to the Bankruptcy Code in the past year to make it easier for more businesses to file for bankruptcy, for most it’s still not a viable option. Even if it’s not the right ultimate option, it doesn’t mean that businesses shouldn’t consider bankruptcy and seek counsel from a corporate bankruptcy attorney. The credible threat of bankruptcy can create a variety of new options that may not otherwise be available.

The threat of bankruptcy can create leverage that allows a business to renegotiate and restructure debts in ways that allow it to continue to operate. From lenders to landlords, secured and unsecured creditors, in most cases, will be better off if their debtors avoid bankruptcy.

For example, with the threat of bankruptcy in its back pocket, a business with an above-market-rate lease can utilize a bankruptcy attorney to approach its landlord to negotiate better terms. The landlord may not be happy about engaging in such discussions, but the business will have leverage because the landlord will be motivated to avoid a bankruptcy filing. In a bankruptcy, the business will be able to reject the lease, leaving the landlord with a vacant space and a potentially worthless unsecured claim. Particularly in this environment, in which commercial real estate is struggling, an operating tenant who is paying lower rent is better than a bankrupt tenant and a rejected lease.

By working with a corporate bankruptcy attorney before bankruptcy becomes the only option available, a business can pursue a holistic approach that lowers its debts across the board, rather than dealing with parties on a one-off basis. We commonly work with clients to address their debts through an out-of-court workout or restructuring as an alternative to Chapter 11 bankruptcy. This process involves negotiating and entering into a contractual agreement with a business’ creditors in order to resolve debt obligations and move toward financial stability.

The out-of-court workout process involves discussions with a business’ secured and unsecured creditors for the purpose of putting cards on the table—including discussions about the issues that created a company’s financial distress, its current revenues and debt structure, and the plan for moving forward. Negotiations to restructure debts, establish payment plans for past due debts, and address new payment terms then ensue. The end-game is to convince the creditors that a workout is their best opportunity for payment, and to strike a comprehensive agreement memorialized by contractual agreements. Typically, none of this is possible unless creditors believe there is a credible threat of bankruptcy should negotiations fall apart.

One of the key reasons it is important to engage the counsel of a corporate restructuring attorney at the first signs of distress is that restructuring attorneys are both specialists, in their core areas of expertise, and generalists in many other disciplines. Because they are brought in to help businesses address a wide spectrum of issues across the business, they must be competent to advise clients in areas such as real estate, labor, intellectual property, contract issues, financing, and litigation, among others. At a minimum, they must know enough to spot an issue that merits calling in a specialist. They are quarterbacks who survey the field and make the right play calls.

These qualities are critical to help distressed businesses address their financial and operational challenges. Chapter 11 bankruptcy may be the right forum for a business to gain a fresh start, but not always. Many times, the mere threat of bankruptcy, bolstered by the presence of an experienced corporate bankruptcy attorney, is enough to remain out of court and achieve the desired outcome.

If you have questions or require assistance, please contact David Dragich at [email protected] or 313.886.4550 or Amanda Vintevoghel at [email protected].