In the corporate world, Chapter 11 bankruptcy is one of the most reliable ways of solving insolvency problems. It can be viewed as a much-needed lifeline, as it allows a business to continue operating and retaining its assets while repaying debts promptly and efficiently.
However, while Ch 11 is typically the #1 choice – it is certainly not the only one. While your Ch 11 bankruptcy lawyer in San Diego will likely suggest some of these alternatives, it pays to get familiar with the topic ahead of time, which is what this guide is all about.
What is the alternative to Chapter 11?
While the benefits of Chapter 11 bankruptcy are undeniable, as it allows businesses to resolve financial problems in a relatively short period of time, California’s legal system offers a plethora of other options for commercial entities to address insolvency, both in and out of court. It should be noted that the feasibility of these alternatives should be determined based on a unique set of circumstances surrounding the business’s predicament.
Out-of-Court Restructuring
Rather than going through the bankruptcy process, a business may choose to negotiate directly with creditors to alter the debt repayment terms, which can result in extended payment periods, reduced interest rates, and even forgiving a portion of the debt. The options here are:
- Creditor Composition involves reaching an agreement between the debtor and creditors, as well as all (or the majority) of creditors among themselves, to forbear any legal action related to the debt collection in exchange for regular payments from the debtor (among other concessions).
- “Workout Arrangement” involves the debtor reaching an agreement with their financial creditors only, such as bank lenders. This is the next-best alternative to Creditor Composition, as it is easier to execute since it doesn’t require a business to obtain agreement from all the creditors. However, the trade-off is usually more stringent repayment terms, such as providing additional collateral or debt affirmation.
- Debt settlement entails creditors agreeing to a lump sum payment that is typically less than the total amount owed. While this is a viable option for avoiding bankruptcy and related proceedings, it typically negatively impacts the credit score which is why it should be used cautiously.
Different bankruptcy model
In some instances, choosing a different bankruptcy model (i.e. Chapter) may be more favorable for getting out of debt. However, these options are rather limited and typically boil down to:
- Chapter 7 (“Liquidation bankruptcy”) is a suitable option for businesses that cannot or do not intend to continue operating. It involves selling off the assets to pay off creditors, typically followed by the dissolution of the business.
- Chapter 12 is an option exclusive to “family farmers” and “family fishermen”. It is similar to Chapter 13 but with more flexible repayment terms, reflecting the seasonal nature of these operations.
Voluntary liquidation
This option is similar to Chapter 7 bankruptcy, as it entails a business ceasing operations and selling assets to pay off the debtors. However, there’s a significant difference between the two:
- Chapter 7 involves a court-supervised liquidation, where a trustee sells off assets and distributes the proceeds to creditors.
- Voluntary liquidation involves a business selling its assets out of court, which is still a formal process but can be a lot less complicated than Ch 7 or Ch 11.
Where can I find a strategic Ch 11 bankruptcy lawyer near me in San Diego?
At Bankruptcy Law Offices of Mark L. Miller, you can find some of the most experienced Chapter 11 attorneys anywhere from Belmont Park to Old Mission Dam and in between. Our team of specialists offers strategic guidance throughout the process, based on your unique circumstances, as well as fierce advocacy in and out of court. Connect with us today and explore the options that will lead your business to stability!