Out of Court Workout vs. Bankruptcy? Key Questions to Ask.

Times are uncertain. Many business owners are asking themselves questions as to the continued viability of their business and what that might look like.

Should they attempt an out of court “workout” with their lenders? Should they file for Chapter 11 reorganization? Is a Chapter 7 or Chapter 11 liquidation on the horizon?  The answers to these key questions should help guide discussions and decisions regarding if a workout is possible or if bankruptcy is the best option?

1. How much cash or other sources of liquidity does the business have on hand to make immediately upcoming payments? 

The answer to this question will help determine how much wiggle room or time the business has to try to broker a deal with secured creditors and other parties-in-interest outside of court. 

2. What can be done immediately to extend operating cash and sources of liquidity?

Does the business owner or owners have the wherewithal (financially and emotionally) to make an equity infusion? Do strategic layoffs need to be considered? Are there vendor or lenders who are willing to extend payment terms? For example, will the secured creditor(s) work with the business to enter into a forbearance agreement while the business works on an out of court workout?

3. What are the financial covenants (i.e. constraints and limitations) contained in the loan documents? 

Every loan document has financial covenants. The business owner(s) need to understand those covenants and if they have already breached them or are in immediate danger of doing so. Has the borrower / owner already defaulted? If not, what can be done to keep default from happening?

4. Who are the stakeholders of the business? 

Who are the owners and what is the ownership structure? Also, what sort of payments have gone to owners within the last year and for what? This is a critical item to understand prior to filing bankruptcy.

Who are the secured creditors and what are they secured in?

Who are the 10 to 30 largest unsecured creditors/vendors and which are critical to the operations of the business?

I like to say, bankruptcy is a small sandbox. We need to know who we are “playing” with and if they are willing to play/work with the business in order to keep the business viable.

Addressing these big questions, should help business owner(s) decide what must be done now, what should be done soon, and what can be done later.

If you need help understanding your rights in the bankruptcy/work out process, contact the experienced bankruptcy and restructuring attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.