While bankruptcy is not commonly viewed as a desirable solution to financial struggles, Chapter 11 business reorganization can often result in a more favorable outcome than without it.
An Illinois continuing care community, Clare Oaks, is set to emerge from a Chapter 11 bankruptcy reorganization based on a plan backed by secured bondholders with a financial interest in the project. The bankruptcy court has approved the explanatory disclosure statement and a confirmation hearing for approval of the plan is upcoming. The petition listed Clare Oaks’ assets at $107 million and nearly $137 million in debts. If approved, the plan has a projected 45 percent recovery for bondholders who earlier rejected a $16 million offer for purchase of the facility, which would have only resulted in a $10 million recovery for bondholders. Bondholders are owed nearly $99 million.
A Chapter 11 bankruptcy is most commonly utilized by a corporation that has debt burdens in excess of its assets, however, it is also available to small businesses. After filing for bankruptcy, creditors will be held off while the company pursues a plan for profitability, usually involving cutting costs or seeking new income streams. Either a debtor or creditor can file for Chapter 11 bankruptcy; if the latter occurs, it is called an involuntary petition.
An alternative to a Chapter 11 bankruptcy is Chapter 7, which involves a liquidation and payoff. Under Chapter 11, creditors have more of an incentive to work with debtors to renegotiate repayment plans for the creditor because under Chapter 11, creditors are more likely to receive a greater portion of what is owed to them. In the final step in a Chapter 11 proceeding, once the reorganization plan is confirmed, the prior debts are discharged and the debtor begins payments on the new agreements.
A Chapter 11 bankruptcy can lead to future profitability. In this way, it can provide relief to debtors and even creditors.
Source: Bloomberg, “Madoff, Kodak, Journal Register, Lehman, H&M: Bankruptcy,” Bill Rochelle, Sept. 17, 2012
Keywords: ANCHOR TEXT: Bankruptcy; KEYWORDS: filing for bankruptcy, business reorganization, Chapter 11