A path forward when a crisis ends business and life as usual: Insolvency Options for Debtors and Creditors

By: Jeffrey Lynne April 23, 2020 6:40 am

Time to read: 5 Minutes

In moments of economic uncertainty companies and individuals begin to ask questions: (I) How will we meet this month’s obligations? (II) what if deal “X” or government program “A” does not address my issues? and (III) what options do I have to address creditor issues? Similarly, creditors may ask questions, such as: (I) how can I collect debts owed? (II) is the proposal offered by the debtor fair and reasonable? And (III) what options to I have if the borrower files for bankruptcy?

​Below is an overview of the various insolvency proceedings and how they operate. There’s no one size fits all approach. Overall goals and timing considerations should guide strategy decisions.

Chapter 7 Bankruptcy

​Federal Court process available to both individual and business debtors. This is commonly known as the liquidation bankruptcy. Non-exempt assets are turned of the debtor are turned over to a Chapter 7 Trustee who in turn liquidates the assets and distributes them to creditors under a priority scheme. A key consideration for individuals is whether they will be able to exempt or otherwise protect the asset from distribution. Common examples in Florida include homestead property and tenancy by the entireties property for married couples. Unless an objection is successful or an exception applies, at the conclusion of the bankruptcy case the individual debtor receives a discharge of their debts.

Chapter 11 Bankruptcy

​Federal Court process available to both individual and business debtors. This is the reorganization chapter where the debtor proposes a plan to pay its debts by, among other things, modifying payment terms or paying unsecured creditors less they are owed. Additionally, in large retail or other bankruptcy cases the modification or rejection of leases is a key feature. Further, this chapter may include the sale of assets, such as real property, equipment, or parts of the business or all of the assets to fund the plan of reorganization. One of the benefits of this process is that it brings all creditors to a common forum to avoid costly piecemeal resolutions with some, but not all creditors. Under both Chapter 7 and Chapter 11 the “automatic stay” comes into effect upon the filing of the bankruptcy case to pause most creditor collection efforts so that they can be addressed before the bankruptcy court.

Assignment for the Benefit of Creditors (“ABC”)

​State Court process available to both individuals and businesses, but in practice is almost exclusively business based. In an ABC, a business assigns all of its assets to an assignee who it chooses to liquidate the assets and distribute them to creditors, in a fashion similar to a Chapter 7 Bankruptcy. During the course of an ABC the assignee may sell all or a portion of the assets or pursue claims to recover funds for creditors.

Creditor Workouts

​Creditor workouts do not necessarily involve or require a Court proceeding. Instead, businesses or individuals engage in negotiations with their creditors in order to achieve consensual modifications of agreements. While this approach requires piecemeal resolutions compared to the above, if there is only one large creditor this form of resolution may allow the business to resolve the one issue and continue operations.

BMULaw has experience representing debtors, creditors, landlords, lenders, purchasers, and sellers, trustees, and assignees in insolvency and other distressed situations. BMULaw uses these experiences to develop strategies to advance its clients’ goals.

Please contact our bankruptcy and restructuring department if you have questions or would like to discuss options.

This blog is made available by Beighley, Myrick, Udell, Lynne + Zeichman, P.A. “BMU Law” for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Beighley, Myrick, Udell, Lynne + Zeichman, P.A. “BMU Law”, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship.