An Alternative to Chapter 11 Under the Bankruptcy Code Many attorneys automatically put financially troubled companies into bankruptcy without exploring alternatives. A decision is best made when all possible avenues are thoroughly explored and discussed beforehand. More times than not, the expensive and time consuming bankruptcy process can be avoided if the debtor’s creditors are given an opportunity to participate in the Out-of-Court Reorganization process. What is an Out-of-Court ReorganizationOut-of-Court Reorganization is the alternative to reorganization under Chapter 11 of the Bankruptcy Code. The Out-of-Court reorganization process enables management of the debtor to keep control of the debtor’s assets while attempting to reorganize the financially troubled company outside of the bankruptcy process. |
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Types of repayment programs typically negotiated between the debtor and Creditors’ Committee are: Compromise Settlements: A Compromise Settlement is an arrangement in which creditors agree to accept less than the total amount of their claims, in full settlement. The settlement must be fair (in an amount equal to, or preferably greater than creditors would expect to receive under a liquidation of the business) and must be offered without discrimination to all creditors of the same class. The funds for the settlement usually come from a third party. Such an approach can provide early cash to creditors and allow a distressed business to continue to survive. Funds for the settlement are distributed by CMA to ensure equitable recovery by all creditors. |
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Q. When management agrees to convene a meeting of creditors, who should be invited to attend that meeting, and what information should be given to creditors? A. Management is encouraged to provide CMA a complete list of all creditors, as more harm than good can result by failing to invite "all" unsecured creditors to the first meeting of creditors. Using the list provided by management, CMA invites all creditors in writing to attend the meeting which is generally set 10 to 14 days from the notice date. Management of the debtor is urged to bring to the meeting copies of current financial information that will enable creditors to understand the financial condition of the company and its prospects for rehabilitation. CMA also recommends that management prepare a liquidation analysis of the company’s assets, that generally reinforces the fact that the value of the company is in its ability to generate income on a going forward basis an not through liquidation. |
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