Take Your Time and Look Before You Leap
When a Chapter 11 reorganization case is filed, it is essential to have your exit strategy in mind at the outset. There are some simple rules to follow. Never file until you know that you will be better off the day after you file, than you were the day before. A good example of this is when a foreclosure is scheduled. If you don’t file the case, the client will lose the property. If, however there is no emergency, then take the time to decide the goal of the case and develop a strategy for achieving the goal.
If the debtor still cannot pay its regular operating expenses after the filing, that is a problem. The Court and the creditors will not be patient if your client continues to fall behind on ordinary bills (as opposed to longstanding old debt) after the filing. If the Debtor cannot pay a bill from a former landlord immediately, that is something that can be worked out. In contrast, if the Debtor cannot pay its current rent, it will have an immediate problem in the case. Be prepared to either cut costs and expenses or explain why the client’s income will be increasing in the near future.
The Debtor will be asked at the outset, at the meeting of creditors, why it filed, and what its plan to reorganize will be. The debtor must be able to articulate whether it intends to operate, refinance or liquidate. It can have a preferred plan and then a backup but simply saying, it will have to decide will not be appropriate. Explaining cutting costs, establishing new marketing methods, changing the business model, reducing locations, and similar approaches are all acceptable, but they must be fact based and thought through in advance.
Establishing both realistic goals and a road to reach them before filing are essential to pursuing a successful Chapter 11 case.