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Free-falling in Chapter 11 Bankruptcy

Valuations in Distress

By: Laura Day DelCotto

I wish a “freefall” chapter 11 bankruptcy was as awesome as when Jerry Maguire is driving through the Texas countryside after his handshake deal landing Cush. (Handshake deals are a whole ‘nother issue entirely!)   Unfortunately, not so much.

How is Freefall Chapter 11 Bankruptcy Different from Prepack Chapter 11?

In restructuring parlance, this is a distressed debt situation where there is no agreement on what will happen in the chapter 11 case before it is filed.  There are no agreements with creditors on the terms of any restructuring. Often there are no agreements about use of cash collateral or a DIP loan to fund the case.

 Freefall is the opposite of a “prepack” or a “prearranged” case. Prepacks are a very technical situation with some special rules regarding solicitation of votes before a filing. They have historically been rare in our courts.  Prearranged just means you have talked to some major creditors before the filing, and have some general agreements about how to proceed once the button is finally pushed to electronically file and start the chapter 11 process. It may also mean that certain parties have signed binding agreements called “Restructuring Support Agreements” (RSAs) in advance of the filing.  

Sometimes we have seen situations where there were reasons not to mention the filing at all until it was filed, with a quick communication plan put into place to begin reaching out immediately. However, free-fall is never desired when it can be avoided. It is certainly more costly and usually takes longer.

Increase in Chapter 11 Filings Projected

Data from the American Bankruptcy Institute (ABI) reports that commercial chapter 11 filings increased 29% in 2020 over 2019. While we haven’t seen this uptick in either Eastern or Western Kentucky, most anticipate an uptick sometime in later 2021. This is possibly when government stimulus winds down and when creditors begin to enforce remedies on defaulted loans. 

This leads to the ever-present question of valuation of assets and going concerns. There are many zombie companies out there in the weeds, companies whose interest expenses alone exceed operating incomes. Once creditors begin to enforce strict compliance with terms, these companies have very little options. 

Be an Informed Business Owner

As a business owner, always be looking ahead, and thinking about all the possible outcomes. Understanding the chapter 11 process and how it might apply to your company is never a wasted exercise. Including the latest provisions from the CARES Act extending relief for small businesses. In fact, it can provide clarity in decision-making as all of this economic upheaval continues to unfold. Our attorneys will be pleased to speak to you about these matters, and know that we can help provide you information that will assist in your business survival or transition.  

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email info@dlgfirm.com or reach us on our contact page.

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