How Bankruptcy can help Businesses with Cash Flow Problems
Cash flow is one of the most significant issues businesses contemplating filing chapter 11 or subchapter V[1] face. Although chapter 11 and subchapter V do not typically result in an immediate infusion of cash into the business, filing can provide some relief for frustrating cash flow issues, and, often provides solutions for cash flow on a long-term basis.
Chapter 11 and subchapter V provide businesses time to regroup, reevaluate operations, and renegotiate debt in ways not available outside of bankruptcy that will allow the business to continue operations, stop the bleeding, and plan for a better future.
How does chapter 11 or subchapter V help businesses with cash flow issues?
1) The bankruptcy stay or “automatic stay” imposed by 11 U.S.C. § 362 prevents creditors from taking any action to collect or enforce a debt against the business (and its property) without prior bankruptcy court approval, including the prosecution of lawsuits against the company. This breathing room gives businesses time to regroup and plan new ways to operate at a profit.
2) Once the chapter 11 or subchapter V case is filed, your attorney will begin reaching out to creditors to negotiate repayment of the debt due immediately before filing the bankruptcy case. This is called “pre-petition debt.” Depending on the type of debt and the value of the property that may be securing the debt, your bankruptcy attorney may be able to strip off or reduce the lien attached to the property, reduce the monthly payment amount, adjust the length of the repayment term, change the monthly due date for payments, and adjust the interest rate.
3) Filing chapter 11 or subchapter V provides businesses leverage not available outside of bankruptcy. Specific provisions in the bankruptcy code, called cram-down provisions, allow the company to force a creditor to accept new terms on pre-petition debt through a confirmed (i.e., court-approved) bankruptcy plan. The leverage the cram-down provisions provide often helps the business reach consensual repayment terms with the creditor before the hearing to confirm (approve) the debtor’s proposed reorganization plan.
4) The “claw-back” provisions of the bankruptcy code allow businesses to take back certain debt payments made to creditors within a certain period shortly before the case filing to assist with its reorganization. This money can then be used to fund the business’ reorganization plan.
5) The bankruptcy code allows debtors to “accept” or “reject” executory contracts (such as a lease agreement), potentially providing a legal way out of overly burdensome contracts before the contractual end date.
6) The bankruptcy code provides “super-priority” status to lenders willing to fund businesses with their chapter 11 or subchapter V reorganization plans. These lenders, called “DIP lenders” or “Debtor-in-Possession lenders,” are incentivized to work with businesses in chapter 11 or subchapter V due under the bankruptcy code.
If your business has cash flow issues, click the button below to schedule a free phone/video consultation with Melissa Youngman Law. We will discuss all options available to you, including non-bankruptcy options.
[1] Subchapter V is a type of chapter 11 case available to small businesses.
Melissa Youngman Law helps businesses and business owners throughout Central Florida. With over 20 years of experience, attorney Melissa Youngman provides legal services to Florida businesses at every stage, including formation, succession, and reorganization.