Tough choices

Here at Weltman & Moskowitz, LLP, we see many business owners experiencing cash flow challenges due to the economic downturn or seasonality issues. The result is the same: unexpected revenue dips and inability to manage cash. Other managers of once successful businesses come to us with financial setbacks stemming from partner deadlocks, shareholder disputes, poor business decisions, or lack of attention to legal or accounting matters.

Still others complain of underperforming assets.  Difficulties may include the need to eliminate contract liability or restructure legacy employee benefits in order to succeed. The appropriate solution may or may not be within the borrower’s grasp. Prepared management may be able to negotiate directly with their creditors depending on the amount of debt and complexity of the restructuring issues.

In other situations, it is the lender or property owner who needs legal help when a borrower, tenant or key customer seeks bankruptcy protection. No matter how deep the financial difficulty, you need an attorney with expertise in insolvency crisis management and the ability to develop solutions and create a winning turnaround plan. In most cases, achieving an out-of-court workout or consensual composition agreement is the most desirable outcome.

Prepare to communicate

How will you know whether a composition agreement or creditor workout is attainable? Start by collecting your financial and legal documents. Focus on the most critical and urgent issues. Take into account asset liquidity and total debt exposure from the bottom up and the top down.

Review your monthly obligations, your asset and liability reports, and your financial position with lenders, suppliers, employees, and others. Be realistic. Have assets and accounts been commingled? Are books and records current? Analyze the secured and unsecured business debt ratios, as well as liens, taxes, judgments, unfunded liabilities, contingencies, available reserves, and similar factors.

An experienced business bankruptcy attorney will suggest strategies and be able to prepare an action plan. He or she will know when you should communicate with your creditors directly or through a representative Time is short and missteps are not an option, so be sure to choose your professional team wisely.

Taking everything into account, your attorney may view an out-of-court workout or consensual restructuring as insufficient or futile. If so, only then should you consider a Chapter 11, a state-court assignment for the benefit of creditors, or a business dissolution and liquidation.

Chapter 11 basics

In situations where business liabilities become so entangled by burdensome debt, inflexible creditors, prior contractual obligations, an out-of-court workout may not be enough. After an assignment for the benefit of creditors is ruled out, debt restructure through a court-approved bankruptcy plan should next be considered, Chapter 11 comes into play when the stakes are high enough and there are significant assets and opportunities to protect.

There are any number of reasons why a business debtor or individual with substantial business debt may need to pursue creditor relief through Chapter 11. Creditor positions may have hardened so that one or more suppliers are intent on pursuing disruptive collections. It could also be that a lawsuit, judgment or some other emergency requires a drastic solution to prevent the closing of a facility or the immediate loss of cash or business opportunities.

In the United States, Chapter 11 of the federal bankruptcy code governs business reorganization and debtor-managed asset liquidation. On the other hand, Chapter 7 governs the administration and liquidation of pre-petition business assets through a court-appointed trustee. Chapter 11 permits a business debtor to maximize the going-concern value of business assets while holding off creditors and maintaining the operational status quo.

Crafting the plan

In short, Chapter 11 offers management-supervised safe space to operate while a plan is developed. The plan--requiring both creditor and court approval--pays creditors, maintains jobs, rehabilitates the entity, and reclassifies of business debt.  Chapter 11 debtors continue to manage their own affairs within the bankruptcy bubble.

Hard and soft assets are protected by a type of restraining order which halts collection action and preserves cash flow. This restraint, also called the automatic stay, prevents creditors from collecting debt, obtaining judgments, seizing property and taking other action to seize property or drain critical cash from the business.

Bankruptcy rules recognize the value of a reorganized business is substantially greater than the value of individual assets. Understandably, then, Chapter 11 is deployed by troubled businesses to maintain and pay staff, fund operations, reject unwanted leases and contracts, and reclassify debt. When a business is rehabilitated rather than hacked up and sold off, jobs are saved, assets are retained, and creditors and equity participants are often rewarded with smaller losses than if the business had been sliced up piece by piece.

Keep or toss assets?

We have seen that a Chapter 11 debtor-in-possession can strategically restructure debt, preserve worthwhile property and toss or downsize the rest. Unlike Chapter 7, which permits an individual debtor’s retention of only a limited amount of "exempt" property (no property exemptions are available to business debtors), reorganization of debt and equity through Chapter 11 is accomplished through development of a plan and disclosure statement. The plan provides for fair treatment of claims according to priority, and governs the restructure of business operations.

In many cases, the Chapter 11 plan results from a hard-fought but ultimately consensual arrangement between creditors and equity security holders.  Indeed, bankruptcy law and rules contain provisions authorizing the plan proponent to impose the reorganization or liquidation scheme on objecting claimants in certain circumstances.

Confirmation and beyond

The bankruptcy court is empowered to grant complete or partial relief from most business debt and burdensome contracts. This means a fresh start. In cases involving large business enterprises or publicly held companies, the result of the Chapter 11 reorganization is the transfer of all or a substantial portion of the equity ownership from its prior owners (stockholders) to bond holders and other priority creditors.

In the megacase, debtor’s creditors may accept ownership of the new entity in lieu of payment on claims hoping debtor will eventually succeed financially and provide creditors with compensation for the earlier losses. Along the way debtor can cancel contracts and leases. Debts and contracts cancelled in Chapter 11 can include lines of credit, office, store and equipment leases, labor, pension, health-care, and benefits contracts, supply or operating agreements (involving both vendors and customers), and much more.

After obtaining relief under Chapter 11 and winning plan confirmation, the former debtor emerges as a reorganized entity. Sometimes the process takes a few months, in other situations it may take several years.

Other considerations

The process can be long and costly in part because all stakeholders have the right to be heard. It may also be risky; reorganization efforts often fail. A trustee may be appointed and the business assets can be sold by public or private sale subject to court approval. Either way, the prime goal of Chapter 11 remains to preserve jobs and assets and to pay creditors.

Most business owners and senior managers agree that a commercial bankruptcy filing—particularly one seeking business reorganization under Chapter 11—should be avoided whenever possible. The expectation is bankruptcy reorganization will be distracting, resource-draining, and management’s last resort after all other options fail.

That said, in the right situation Chapter 11 is nearly always preferable to closing the doors altogether. Assuming there is enough at stake, public policy goals encourage preservation of going concern value and maximizing creditor return. All the better if the plan is also able to deliver reduced credit risk to certain stakeholders, typically ownership or senior management.

Dissolution and liquidation

Circumstances sometimes turn out that no negotiation, workout, composition, court-supervised restructure, turnaround plan or other creditor deal will resuscitate a dying business. When this happens, it may make sense to allow debtor to die a natural death. To the extent possible, the company’s objective should be to close down and dissolve the entity while causing as little pain as possible to the critical stakeholders, including creditors, employees and owners.

Again, hire the best team. Investigate bringing in a law firm with resources and experience in resolving complex corporate, labor and environmental issues, such as orchestrating an orderly liquidation in a manner advantageous to the business owners with the least impact on employees, creditors and others.

Typically, the end game takes the form of an structured winding up and dissolution of business affairs. Dissolutions may be consensual or by court order if management cannot agree. Judicial dissolution is accomplished through commencing a state-court lawsuit. Alternatively, management may consider filing a Chapter 7 bankruptcy to administer and liquidate business assets through a court-supervised trustee. Either way, the debtor often looks to limit exposure to ownership’s personal assets when possible.


If you face overwhelming debt headaches and are considering an out-of-court workout, business bankruptcy, or dissolution—from either the creditor or debtor perspective—it is wise to consider your options carefully. Contact an attorney experienced in insolvency matters, bankruptcy litigation and business transactions. To help you understand what’s available and review your concerns, reach out to one of our experienced attorneys today.

About Richard E. Weltman, Esq. and Weltman & Moskowitz, LLP:

Richard E. Weltman is a principal of the Weltman & Moskowitz, LLP law firm, having offices in New York, New Jersey and Long Island. Mr. Weltman focuses on creditor rights and bankruptcy issues, workouts, commercial litigation, shareholder disputes, business divorce and dissolution, business formation, sale and transfer, and other general business concerns, including dispute resolution and transactional matters. He may be reached at 212 684-7800, 201 794-7500, or at