Out-of-Court Settlement
Once your company is reached the point at which your major lenders, to whom you send regular financial reports, and certain suppliers are already concerned about your financial situation. Therefore, it is usually wise to work with your CFO and CTP, Certified Turnaround Professional, to create a written recommendation for an out-of-court settlement focused only on your major creditors.
It should be structured similar to a Chapter 11 Plan of Reorganization. Similarly situated creditor categories should be treated on generally equal terms. Otherwise, they would be unlikely to agree. You don’t necessarily indicate or threaten Chapter 11. Your plan is to avoid a Chapter 11.
Once it is written and appears realistic, schedule an in-person meeting with your primary creditors—one at a time. You should present your written plan at that meeting. It should be either you or your CFO, along with your CTP, to indicate that you have engaged professional guidance and your sincerity.
These major creditors probably already understand your financial situation, and have serious concerns, and welcome the fact and that you and your professionals have developed a specific, realistic plan. As a result, they are more likely to work with you toward its possible success rather than simply becoming defensive and negotiating harder. They will see that you are attempting to avoid significant damage to your company and its creditors, and will likely take you proposal seriously.
Your plan must be designed to treat all similar major creditors the same. Without their believing that, they will not likely agree to your plan. It is important that they read you as being truthful and sincere. They also will not likely agree at the first meeting. They will “think about it.” And they will likely call with questions or want to meet again.
You probably will have many more unsecured trade creditors than larger secured lenders. They can be packaged into groups and, once they see your overall plan, will hopefully agree to at least accept a long-term more affordable payment plan, assuming that your cash flow projections show what could be possible. This would enable them to retain you as a customer.
It is advisable to begin this process well in advance of seeking a bankruptcy attorney until you have a good “feel” whether or not the major lenders or trade creditors are likely to agree. If unable, move to considering a pre-pak. If too late or unable, then the next step is a well-prepared Chapter 11. When considering these options, an attorney should be engaged as needed.
