The worst mistake a CEO can make is waiting too long to address financial instability. When lenders, your CPA, or your CFO begin expressing concern, it’s time to take notice. Optimism, sometimes an affliction of forward-looking CEOs, has its place, but denial is dangerous. Even if bankruptcy feels far-fetched, understanding the fundamentals of Chapter 11 early on is a crucial form of risk management. 

By the time LaRocca was retained, the bank had already called the loan and demanded immediate filing of a Chapter 11 petition. Therefore, it is a necessity for the CEO to adhere to the guidance of the first sentence of the above paragraph. The appendices below provide an outline of a workable process.

As seen in The Club, one of the worst disasters that can befall a troubled company is being forced into Chapter 11 bankruptcy by lenders, trade creditors, landlords, and others without adequate planning, control, foresight, or guidance. These appendices are designed to provide guidance on avoiding a forced, uncontrolled Chapter 11 bankruptcy, which often occurs even to large, publicly held companies. See the case of Piccadilly Cafeterias’ Spectacular Turnaround / Disaster on liuzza.net. They could likely have reached an out-of-court settlement or a “pre-packaged” Chapter 11, as recommended by the author. But they waited a year until the largest creditor forced a Chapter 11 filing, resulting in the owner losing 100% of its equity to that creditor.

Once you recognize that serious financial challenges might lie ahead, these appendices are intended to offer guidance for you to create this process as your TOOL to help avoid a defensive Chapter 11. By employing that same TOOL, you have a good possibility to enable your creditors to reduce their losses and additional expenses that they would endure in a creditor-enforced Chapter 11. Otherwise, by the time the bank calls a meeting with you, as in The Club, it will dictate its already determined plan.

A. Plan and propose to your major creditors what Certified Turnaround Professionals, CTPs, refer to as an “out-of-court” settlement. This effectively creates an informal, unofficial Chapter 11 that benefits both the debtor and creditors by avoiding the time and costs of a court proceeding and the need to deal with numerous lawyers.

Once a draft of the out-of-court settlement is completed, and if your total debt does not exceed $2,725,625, and your initial efforts at an out-of-court settlement were not successful, then consider using the recently enacted Subchapter V (five) version of Chapter 11. This enables small businesses to undergo a Chapter 11 process, enabling them to reorganize their debts in a way that is less costly, less time-consuming, and more straightforward than a traditional Chapter 11 bankruptcy.

B. Should a regular Chapter 11 appear to be the best route, consider the advantage of a “pre-packaged” (pre-pak) Chapter 11, in which most of the legal work is completed and signed by the major creditors before filing the bankruptcy petition.

C. Debtor-in-Possession (DIP) financing can often be arranged before filing Chapter 11. With subsequent court approval, this is attractive to a lender because it will have payment priority over most of the pre-existing creditors, and somewhat higher interest rates.

D. Using an appropriately designed Critical Path Meeting control structure over the planning and actual operations of the bankruptcy process, thereby maximizing the benefits offered by Chapter 11. These regular meetings with your attorney and your CFO, and the accountability they entail, best protect your company from members of The Club—even if your attorney later turns out to be one.

E. How to select and NOT select bankruptcy counsel.