“But isn’t that bankruptcy by another name?”
No, it really isn’t, and the primary reason for that is that a bankruptcy is filed in federal court. It’s a legal procedure, where small business debt restructuring is a negotiation between a business and its creditors to extend payment terms and even reduce some of the debts to manageable proportions. While a Chapter 11 bankruptcy does the same thing, the business’s credit score takes a hit, and it can take a long time to have a bankruptcy discharged, you may also lose non-exempt assets at the order of the trustee to satisfy your creditors. Small business debt restructuring is a great way to make debts easier to pay, and avoid a complicated bankruptcy.
What is Small Business Debt Restructuring and How Does It Work?
Very often the circumstances leading to small business debt restructuring and bankruptcy are the same. A company’s debt load becomes so onerous that it is constricting the cash flow and consuming the profits of the business. An anemic balance sheet scares off potential investors and makes loans a vanishing possibility. Bankers are risk-averse, if you have a large amount of debt, they are not going to want to add to it and hope for the best. The first part of a depth restructuring plan… is a plan.
You can undertake a debt restructuring without looking into the future. You have to decide whether your business is sustainable, decide if you want to stay in business, and make a plan to do it. Business debt restructuring is part of a wider plan, not a plan in and of itself. However, it is the best way to loosen up your cash flow while still meeting your obligations to your creditors. There are several ways to do this.
- Loans, lines of credit, and credit cards are debts that can be restructured by reducing interest rates, asking for forbearance, refinancing, or by simply pushing the date outward when payment is due. For example, a loan that is due to be paid off in June 2022 can instead be paid off in January 2023. Forbearance can mean going a month or two without payment and then resuming payments on a regular schedule.
- A more complicated transaction is a debt for equity swap. This is a transaction where creditors agree to cancel some or all of the debt in exchange for equity in the company. On the one hand, this dilutes the value of shares already issued, but on the other hand, it mitigates a great deal of debt and gives the company more cash for operations.
One of the first things that you should do is to study your debts and decide which ones would do best with restructuring. You will also need to create a budget with your must-pay priorities at the top. After that, you should contact an attorney experienced with handling debt to conduct these negotiations for you. It’s hard to remain emotionally uninvolved in negotiations that mean life or death of your company, likewise, your creditors may be upset that you are trying to restructure your debt. It’s important that they understand that if this fall through the next option is bankruptcy, and that they might not fare as well before the US trustee in a Chapter 11 bankruptcy as they would in a negotiation undertaken outside a courtroom.
Please note, this is NOT a way to get out of paying what you rightfully owe. Your creditors will want to see proof or hardship, and if they refuse to restructure the next place that they see you will be in bankruptcy court. Creditors with liens or collateral tended to receive their compensation first, but unsecured creditors are at the end of the line when it comes to being repaid. If the bankruptcy is a Chapter 7 – a liquidation – some creditors understand they might not receive anything at all, so renegotiating debts could be the best way forward.
About the B-Word
Most creditors would be eager to avoid meeting you in bankruptcy court. However, there are always going to be some people who have to go at it the hard way. Some of your creditors may be unwilling to restructure your debt, however beneficial it would be to you both. If you cannot find a satisfactory resolution and restructuring, it may be in your best interest to file for bankruptcy. Yes, it will hit your credit rating hard, and financing will be hard to come by, but unsustainable debt will put your company out of business. With the reorganization bankruptcy, you would have 3 to 5 years between filing and discharge, and you would be required by the court to make these agreed-upon payments.
With both reorganization bankruptcy and restructuring debt, the outcome is the same. You will be able to save your business, and after a very lean season, emerge on the other end with your debts paid. Because the line is so fine between restructuring and accuracy, we do encourage you to consult with an attorney who has a background in both debt restructuring and bankruptcy.
The CARES Act and Restructuring Your Debt
A quick note regarding the CARES Act SBA loans and bankruptcy – entering into bankruptcy disqualifies your company from being able to participate in the Paycheck Protection Program and other loan programs being offered by the small business administration. Restructuring your debt will keep you out of bankruptcy court and eligible to participate in these programs.
We Can Help!
When it comes to debt, Van Horn Law Group has been dealing with all aspects of debt management since 2009. We have the experience you need, not just for bankruptcy, but for handling student loans, small business debt restructuring, and other issues of overwhelming debt. While we are not seeing clients in the office except as needed, we are still offering our free initial consultation by phone or video conferencing app. Give us a call, and we’ll give you our best legal advice on getting your small business debt restructuring underway!