What are considerations to take into account when evaluating whether or not to file chapter 11?
- Does the debtor have an exit strategy? Common examples would be confirming a plan or reorganization, liquidating or arranging an asset sale. Reorganization plans may entail deleveraging the business or shedding unprofitable ventures or units.
- Can the debtor afford chapter 11? Professional fees and court fees can be quite significant.
- Can the debtor survive a chapter 11? Businesses in financial difficulty commonly hemorrhage employees, customers and vendors. Being a chapter 11 debtor may also prove a distraction for management.
- Does the debtor have sufficient capital or access to capital? The most common methods for chapter 11 debtors to obtain operating capital are through its operations, asset sales, DIP financing or use of its cash collateral.
- Is it advisable to subject to the debtor to scrutiny and/or court oversight? A chapter 11 proceeding is a public matter and certain transactions or dealings (e.g. preferential payments or fraudulent conveyances) may be exposed with unpleasant consequences for insiders, officers or directors. After chapter 11 is filed, executive compensation is subject to approval from the bankruptcy court.
- Would it be easier to shut down the entity and create a new entity conducting the same business? This is often the case with personal service businesses or businesses with low capitalization requirements.
