Bankruptcy

Out-of-Court Workouts

 

Although commonly used interchangeably, the term insolvency is not synonymous with the term bankruptcy. Bankruptcy implies a court process often necessary in order to stop collection actions, foreclosures and other invasive creditor remedies in order to restructure debt, it is often possible to accomplish that restructuring on an informal basis, in what is known as “out-of-court workouts.”

Out-of-court debt restructuring, also known as a workout, is a process that allows both individuals and legal entities to address cash flow problems and financial distress through renegotiating delinquent debts in order to improve or restore liquidity, and to enable continued operations. This process requires direct negotiations in an attempt to formulate a plan that is mutually beneficial given the circumstances. Through out-of-court workouts, both debtors and creditors have the opportunity to benefit from reduced costs, delays and formalities of court processes. Despite the informal nature of workouts, it is paramount that both debtors and creditors retain experienced counsel to advise them about their respective rights and remedies, and the benefits that the process offers over more formal insolvency proceedings.

 

Formal Bankruptcy Proceedings

 

Bankruptcy law became a permanent feature of the American legal system in 1898, roughly coinciding with the closure of the western frontier. Instead of avoiding debts by fleeing westward to uncharted territories, debtors were given an opportunity to obtain a “fresh start” under a new statutory framework. Insolvency law changed little for the next eighty years, until 1978 with the passage of the Bankruptcy Reform Act, modernizing the law in what is now called the United States Bankruptcy Code. The Code, modified from time to time since then, contains the modern approach to insolvency and the contest between a debtor and its creditors.

A bankruptcy case is commenced by a debtor filing a petition under the appropriate chapter of the Code, or in some cases having an involuntary petition filed against the debtor by creditors. Each chapter of the Code requires its own qualifying conditions and offers a particular approach to resolving indebtedness. Chapter 7 is designed for liquidation, by installing a trustee to marshal all of the debtor’s nonexempt assets, sell or otherwise dispose of them and distribute net proceeds to creditors in an order of priority set forth within the Bankruptcy Code, while discharging the debtor of those obligations and allowing the debtor’s fresh start.

Chapter 11, on the other hand, allows the debtor to continue to operate and to negotiate a reorganization plan to restructure its obligations, within certain parameters and conditions provided in the Bankruptcy Code. Chapter 11 is typically utilized by companies seeking to reorganize business obligations. Other chapters provide for other means for resolution, including chapter 9, for governmental entities as debtors, chapter 12, which provides an approach for family farmers, and chapter 13, which offers procedures for individuals with limited amounts of debt.

Under each chapter of the Bankruptcy Code, the commencement of the bankruptcy case automatically “stays” all collection actions and most other litigation against the debtor, in order to provide a breathing spell during which the debtor may attempt to reorganize. Also under each chapter, assuming a successful conclusion and with certain exceptions, the debtor receives a discharge of the obligations incurred prior to filing the bankruptcy petition.

Of course, this is only a summary of a few of the aspects of the Bankruptcy Code, and application to a particular debtor or creditor is more complicated. Having effective legal representation is essential to a successful conclusion in all but the simplest of cases. At Meyers Law Group, P.C., it’s our extensive knowledge, perseverance and determination that enables us to deliver the most advantageous outcome for our client.

Meyers Law Group, P.C., has the knowledge, skill, and expertise to not only evaluate the unique pros and cons of each forum, bankruptcy or out-of-court workout, but also to effectively counsel you regardless of which path you ultimately choose. Having professionals on your side that are prepared for either forum will enable you to prevent unnecessary delay, duplication of efforts, and increased expenditures. Meyers Law Group, P.C., is ready to counsel you forward today.