Corporate bankruptcies are somewhat misunderstood. While Chapter 11 bankruptcy is called a reorganization, the idea that a business will emerge from bankruptcy stronger is not as simple as just filing for bankruptcy. Instead, there are other relevant factors required that will allow a bankruptcy to rehabilitate a business.
Currently, the once-mighty Sears Holdings is currently in bankruptcy and seemingly on the verge of a liquidation. In the event of a liquidation, Sears’ assets will be sold and Sears, as a business, will be wound up. The proceeds of the sales will go to its creditors and Sears, as a liquidated debtor, will not receive a discharge. As a result of a liquidation, if it occurs, Sears, once a renowned name in the United States and the world, will cease to exist.
Eddie Lampert, the Sears chairman and former CEO, was involved in securing debt financing for Sears over the years. While the financing kept Sears afloat, critics felt that Lampert did not craft a plan that would keep Sears viable. Instead, critics say, Lampert simply leveraged Sears assets for loans so Sears could be infused with cash.
Sears may be saved if a buyer offers an acceptable bid and the Bankruptcy Court overseeing the Sears bankruptcy approves the sale. Observors feel that a successful bid is unlikely. The most likely scenario, according to many, is that Sears will liquidate and simply become a former retailer that once held iconic status.
Having a Plan
Having a plan is a key element when exploring a bankruptcy petition. Simply filing for bankruptcy, while affording a debtor advantages like the automatic stay, does not mean that the company will survive. Creditors may motion for converting the Chapter 11 reorganization filing into a Chapter 7 liquidation. Similarly, a Chapter 11 may start out as an attempted reorganization and end up just being a liquidation. In that case, upon completion of the liquidation, the debtor company will not obtain a discharge.
To that end, a reorganization plan is key. If a company files bankruptcy so that it can reject onerous contracts, the bankruptcy filing may be sensical and effective. A company can reject some bad contracts and continue with business as usual with the other creditors.
On the other hand, a business struggling in debt may not get far in Chapter 11. Creditors may view this as a last attempt to hold them off. In such a situation, the business may be desperate and is just hoping that someone will step forward and rescue them, which is usually unlikely.
Therefore, when filing for bankruptcy, it is best to contemplate a plan for funding. Speak with potential lenders and turnaround specialists who can determine whether your business has prospects of being saved. There may be access to cash that can be the difference between life and death as far as a company is concerned.
Is your business in debt? Bankruptcy may be the right move for your business. Speak with the Hayward corporate bankruptcy law firm of Melanie Tavare, experienced bankruptcy lawyers.
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