How Chapter 11 Gives Businesses Leverage in Negotiation
It is rarely easy for a struggling business to negotiate with its creditors. After all, creditors care about getting paid, not what a business has to do to make that happen. As a result, creditors may demand immediate payment on past-due bills, threaten lawsuits over unpaid accounts or pursue collection actions. Chapter 11 changes that dynamic by placing negotiations under court supervision, in a structured environment where pressure on business owners is more limited.
The automatic stay that goes into place once a bankruptcy petition is filed immediately halts most collection activity, giving businesses breathing room to evaluate their financial situation and develop a strategy for long-term financial stability. An owner is afforded time to focus and to develop a plan to restructure, while still continuing to operate as a debtor in possession. With the stay in place, the business can negotiate from a position of stability rather than desperation.
Negotiation strategies differ depending on the type of creditor involved. Secured creditors are those with collateral backing their loans, like real estate, equipment or inventory. Secured creditors are most concerned that the restructuring will adequately protect the value of the collateral. Negotiations often focus on extending repayment dates, modifying interest rates and restructuring the loan terms.
Negotiations with unsecured creditors have a different focus. Because there is no collateral attached to their claims, creditors may be more willing to accept reduced payments, extended repayment periods or other compromises — particularly when the alternative (liquidation) would leave them with less.
Chapter 11 also gives a business the ability to address burdensome contracts and commercial leases that may be contributing to financial distress. Subject to court approval, a debtor may negotiate for modified terms that better reflect the company’s current financial circumstances or the market conditions. This flexibility often becomes an important bargaining tool during the bankruptcy restructuring process.
In all cases, the bankruptcy court trustee places a critical set of eyes on the process, making sure that it is fair to everyone and the business owner is not unduly pressured by any creditor. That alone can make creditors more willing to come to the bargaining table.
By creating an orderly process backed by court authority and the protections of the automatic stay, Chapter 11 allows businesses to come to negotiations with some leverage. That said, negotiations benefit from careful planning, realistic financial projections and a skilled bankruptcy attorney with a thorough understanding of creditor priorities.
At the Law Offices of Michael Jay Berger in Beverly Hills, we help the owners of struggling companies pursue their legal options for debt relief and restructuring, including Chapter 11. Schedule a free consultation by calling 310-271-6223 or contact us online.
