Chapter 11 Bankruptcy is a great financing tool; if you know how to use it.
It is a double edged sword, if not carefully done, it will force you to close down your plant and also be personally liable. If done right, it decreases your debt obligation, sometimes up to 60% and gives you a chance to get back on your feet.
If compared to surgery, Chapter 11 is on top of the list as a brain surgery and shouldn't be trusted to a family member or a new comer removing tonsils. A dismissal means loss of business, loss of income and damaged credit and no where to turn to make it good again.
To get organized prior to filing is the key. Most businesses file for Chapter 11 after they have exhausted all other options and creditors are knocking at their door. Most courts are very busy and will grant a sanction period of 60 days. During this short time the petitioner's attorney doesn't have enough time to prepare the workout package, which means building consensus with the trustee and creditors and find an outside lender, to complete the package to be presented to the judge for approval. The court moves to dismiss the case, the business is either auctioned off or bombarded with collection lawsuits.
If an outside lender is found at the last minute, still the creditors consent has not been reached. If the request to extend the sanction period is granted causes additional lost interest income by the lender, who is not allowed to add such losses to its original loan approval. The lender moves away from the transaction and the case is dismissed after everyone has spent a lot of time and money to bring it to that point.
Contrary to government, most private or institutional lenders don't print money.
They have to cash in certain instruments and have the money ready for a specific date to be placed in escrow (or with trustee) to pay off the creditors.
Here is a simple example why most lenders will not work with most Chapter 11 petitioners or their attorney:
If the lender was going to charge 12%, that is 1% per month
If the loan amount is say $10 Mil dollars, that is $100,000 per month
If the money sits around for couple of months, the lender has lost $200,000 and the court will not allow the lender to charge an accrued interest to the petitioner's loan.
So the transaction dies at the last minute, since the petitioner was not ready BEFORE filing for Chapter 11
Solution:
How I have resolved this problem?
- I bring in attorneys whom I have very good control and we work in sync.
- I take on clients who have a plan to survive this tornado, before it reaches at their doorstep.
- I prepare the package and obtain everyone's agreement BEFORE filing for Chapter 11
- I obtain commitment letter (not a term sheet) from the lender and set a closing date.
- I present the completed package to all concerned and obtain approval.
- I cause the funding to take place on time, everyone gets paid and the client gets discharged.
If you like my method, contact me with an e mail Walter@tradeway.us or call 661-263-1482 describing what needs to be done.
I am the missing component in Chapter 11 DIP financing. This component can not be divided between other professionals to save money, or outsourced to claimants who may convince you that they know how it's done.
Knowing how it's done is a trial and error approach.
Actually doing it the right way the first time is a tested skill.
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