Unfortunately, many businesses are confronted with extraordinary losses and may be forced to choose between a creditor workout or a reorganization bankruptcy in order to survive. Some of the differences between workouts and bankruptcies include.
- Timing. A creditor workout is generally faster than a bankruptcy and can involve only a few major creditors as opposed to all. Bankruptcies also take longer because of the required notices and formalities.
- Cost. A creditor workout is usually less expensive than a bankruptcy as there are fewer filings and professional fees.
- Disruption to Operations. Unless a company is publicly, traded, owned, or has publicly traded debt, a creditor workout can be private and usually has less effect on vendor relations and employee morale.
- Ongoing Litigation. A creditor workout may have no effect on ongoing litigation unless the creditor agrees to a stay. The automatic stay of a bankruptcy immediately halts all ongoing litigation, allowing the company to focus its efforts entirely on reorganization.
- Binding Nature/Cramdown. A creditor workout can only bind the parties that agree to the workout. A bankruptcy reorganization or liquidation binds all creditors.
- Equity Retention Existing shareholders rarely give up control or ownership during a creditor workout while existing equity is usually lost or reduced in a bankruptcy reorganization. The recently modified subchapter V of the Bankruptcy Code makes it easier for small business owners to retain their equity in a bankruptcy reorganization.
Handling a restructuring through a bankruptcy, a workout or some other method is case specific and should only be pursued with proper professional advice. While a workout is generally cheaper, less disruptive and faster than a bankruptcy, it is far less comprehensive and may leave certain issues unresolved. If we can assist you in this situation, please contact us.