Non-Bankruptcy Workouts vs. Chapter 11 Reorganizations

Workouts are one popular alternative to filing for bankruptcy. A work out is a privately negotiated contract between a debtor and key creditors in which there is typically a reduction of debt or an extension of payment terms. Advantages of workout include: (1) they are good for temporary difficulties, for companies without serious operational problems, companies with too much debt or suffering from an internal shock; (2) workouts are usually less expensive than Chapter 11; (3) there is no court interference; (4) workouts are private agreements so there is no concern about the public stigma often associated with a bankruptcy filing. Downsides include: (1) workouts require widespread creditor acceptance which is often hard to obtain; (2) workouts do not bind non-consenting creditors; (3) workouts do not provide for recovery of fraudulent and preferential transfers, or rejection of contracts and leases; (4) there is no automatic stay so non-consenting creditors can continue to pursue individual claims

A privately negotiated contract to work out the debtors financial difficulties may contain many of the same features as a Chapter 11 plan. What is missing, however, is the collective and compulsory doctrinal and procedural framework of Chapter 11. Such framework has some advantages over the private workout that the parties may want to utilize. The bottom line is that before jumping towards bankruptcy, a debtor may want to at least consider if a workout may be right for their company.