Alternatives to Bankruptcy — Part 1 Short

Topics:

• 13-week cash flow reports
• Forbearance agreements
• Alternatives to bankruptcy
• Speaking with vendors pre-filing
• Good restructuring plans

Guest: Nick Jalowski — Cambridge Financial

This is an abridged version of the original episode. Feel free to go back and listen to the full version in our show feed.

Want more content? Then head over to Patreon and become a member. On Patreon we are working on a catalogue of bonus episodes and you can hear the answers to your questions from a business perspective instead of just a legal one. If you want more direct access to Neil and Steve or want to supplement the education you are already getting here, then follow the link in the show notes below and become a Patron today.

Transcript

SPEAKER_00 0:01

You are listening to Corporate Bankruptcy A to Z, a podcast that gives you the ins and outs of corporate bankruptcy. This is an abbreviated release of episode three, where we will cover alternatives to bankruptcy, the role of 13-week cash flow reporting, how forbearance agreements work, communicating with creditors, and what makes a strong restructuring plan. If you are new to the show or want to hear the full conversation about this topic and more, we invite you to check out our full bankruptcy series found below in the show feed. There you will find an unedited version of each episode where we dig deeper and answer more questions. Corporate Bankruptcy A to Z is hosted by Neil Goldstein, a chief restructuring officer with over 30 years experience. He's joined by co-host and legal expert Steve Raven of Sol UI, a bankruptcy attorney with over 40 years in the field. If you are dealing with a situation now and need guidance, you can reach out to them directly. Call Neil at 940-808-9451 and Steve at 973-286-6713.

SPEAKER_02 1:11

For this episode, we have a special guest, Nick Jalowski of Cambridge Financial Group. What does the lender need from you as a business consultant?

SPEAKER_03 1:22

It's dependent on the assignment. You know, if it's a little further, if it's a really distressed situation, the first thing they want us to do is a 13-week cash flow, which basically that's a tool we use in the turnaround industry where we plot out the actual cash inflows and outflows that are expected over 13-week timeframe, which is about three months. And the idea of that is can this company survive for 13 weeks to allow us to be able to go in and actually do some restructuring work to either turn it around or to refinance it somewhere else if the bank wants them to be uh leaving.

SPEAKER_02 1:59

I'd like to have both you and Nick give uh an explanation of a for what a forbearance agreement is and how it works for both the lender and company.

SPEAKER_03 2:09

Well, that's a legal question, Neil. But I can I'll take it from a business standpoint. Sure. And when there's a default or there's there's a violation of the loan agreement, you know, the bank has certain rights on what they can do. They can call the loan, they can do other things. Uh so the forbearance agreement is basically a document that says, look, we'll forbear. We we will not exercise our rights as long as you do X, Y, and Z. Their forbearance agreement is negotiated in good faith where you know that you think the company's going to survive and they just need some help.

SPEAKER_01 2:47

It's a sign that there is a critical uh situation and the bank has their uh binoculars on and they're looking very closely to make sure things do not go more awry than they already are.

SPEAKER_02 3:03

Does the client have a choice in signing a forbearance agreement? Or is it just a fait accompli that when the bank asks for it, the client will signal?

SPEAKER_01 3:16

Well, I mean they have a choice. They can file bankruptcy, for example. Uh they can't say no. Uh they can get a replacement lender, uh, but that doesn't happen so quickly. Uh so they can't just simply say no, we're not doing it. You are giving up all your rights. Which is something the bank wants to get, because you know they may feel that you may sue them for something, whether it's uh valid or not, but this gives up your ability to do that.

SPEAKER_02 3:51

When you determine the company needs a restructuring event, do you discuss alternatives to uh bankruptcy filing with the client?

SPEAKER_03 4:00

Always. Always. Bankruptcy is the last thing you you you want to do. So you want to look at you know, whatever you can do to turn around or resolve the situation without having to file a bankruptcy. You can pretty much do anything outside of bankruptcy from a business standpoint that you can do in bankruptcy. It's just you got to get everybody to agree to it. And that's the hard part. You know, getting everybody to agree like you would in a bankruptcy. You know, bankruptcy is you know, taking care of each class of creditors, and uh you can you don't have to deal with each one individually, you know.

SPEAKER_02 4:36

The greatest impact for a company filing for bankruptcy seems to be on creditors who will not get paid as usual. Do you advise the company to speak with creditors?

SPEAKER_03 4:49

I guess it depends on the creditor, you know, who which creditor it is. I mean, you gotta be careful because certain critical vendors that you know that that may be huge in relation to your operation, if you tell them you're having some problems, they may cut you off right away. You know, whereas, you know, other creditors, you you can discuss the situation, especially if you're gonna do an out-of-court reorganization, you're gonna have to talk to them, you know, and and uh explain the situation and explain why the out-of-court reorganization that you're proposing is a much better result.

SPEAKER_02 5:22

Do you find that creditors are usually willing to work with the company during a restructuring period?

SPEAKER_03 5:29

Again, it depends on the creditors. I mean, some of them uh yes, you know, they especially if you have a long relationship, um, you know, we lean on uh the fact that, you know, look, this is a temporary problem. We can hopefully return the company back to health and you can continue to do business, you know, going forward, which the creditor wants. You know, they want to do the vendors do want business going forward. So they say, all right, we'll take a little bit of a hit now, but at least we can make it up with profits on what we're gonna sell you down the road. So a lot of you know, a lot of creditors are are are willing to listen, especially like times like this where everybody is feeling some pain.

SPEAKER_02 6:07

What should the creditors be told about the company's situation and what should they avoid saying typically I tell a company to disclose as much as possible because that's how they gain credibility as a troubled company.

SPEAKER_01 6:28

On the other hand, the one thing I will tell a company is do not promise to pay your the creditor a hundred percent. You know, sometimes a company uh in order to avoid bad feelings, they'll whisper in the ear of the creditor, don't worry, we'll take care of you. And that uh can get them into real trouble if ultimately they're not able to take care of that creditor. I I often talk to Nick about this, what I'm about to put on the table here, and that is whether or not to to mention to a lender, if you're representing a borrower, that you are having serious problems, because the lender can immediately close the bank account because usually the borrower does their banking with that lender. So the lender, just by a mere phone call, can freeze the account and then you're really left out in the cold. Uh so it's always uh a bit of a fine line. On the other hand, you want to be up front with the lender because if you're not, that will come back to bite you.

SPEAKER_02 7:48

So if a company chooses an alternative to a bankruptcy filing, who should quarterback the process?

SPEAKER_03 7:57

I think it would be the restructuring professional, you know, should go in there. That's the that's the the services they're providing. You know, they're they're putting a plan together. You have to bring on you know the right other people. You always have to have a uh insolvency attorney uh there as well for for a couple of reasons. Not not just in case you have to file a bankruptcy, but it does telegraph that you know you are willing to do that if you have to. The restructuring professional will put the plan together and be the communication to the uh stakeholders, you know.

SPEAKER_02 8:27

Well, we've talked a lot about a plan. What type of plan could be put into place?

SPEAKER_03 8:34

A payment plan over time. Um you know, e each case is different, Neil. You know, I mean it's it's it depends on the the elements of the of the the company you're dealing with. I mean, if they're losing money, you you have to conserve as much cash as possible and then you know turn the company around so it's generating positive cash flow, and at that point then you can maybe start making payments on old debts. So if the company is just less profitable than it was, but it's still very viable, it might be a different plan, you know.

SPEAKER_01 9:06

Uh oftentimes, most most often, the lender wants the company to survive, and the lender will make funds available, if need be, to sprinkle around to the unsecured creditors so that the unsecured creditors, number one, will continue supplying the borrower. Uh, you know, it this uh putting together a plan is like a jigsaw puzzle where every piece has to fit exactly in place in order for the plan to work.

SPEAKER_02 9:42

Nick, could you give some reasons why the creditors should go along with the plan?

SPEAKER_03 9:48

The way I usually couch it is this. I say, look, if you if we can do this reorganization outside of bankruptcy, the recovery you're gonna get is much more than you would get if we file a bankruptcy. And that's typically the only reason somebody will take take a discount is if they pursue all their legal recourse all the way through bankruptcy, if they're gonna get 10 cents on the dollar, and you do that analysis for them, you actually show them what happens if it's a liquidation. If you're gonna get 10 cents on the dollar, but uh this plan is offering you 50 cents on the dollar, and you can convince them that it's a better situation for them, they'll usually go along with it.

SPEAKER_01 10:26

One thing, Neil, the ace in the hole is if the creditor that Nick is talking to uh received a payment within the prior 90 days, not only will the creditor not get paid the current debt, but they're going to be sued on uh having received a preferential payment. So there, if those circumstances are what's on the table, they're happy to support an out-of-court plan restructuring.

SPEAKER_02 10:56

Nick, when you go out and you speak to creditors about a possible alternative plan and a restructuring, what happens if the creditor doesn't like what they hear and they begin litigation?

SPEAKER_03 11:11

Well, that happens. I mean, you know, somebody's upset and they just want to go right to litigation. I would tell the client, first thing is don't ignore it. You know, you got to answer the claim. You can't let them go right to get a judgment, you know, uh, without you fighting it a little bit. And if you have some kind of dispute on the amount or whatever, you can tie it up for a while while you're trying to uh come up with alternatives for that particular creditor. The suit may be filed, but they're really most most creditors are looking for a settlement, and maybe they just didn't like what you offered and you gotta negotiate a little better deal for them.

SPEAKER_02 11:43

Nick, what are the chances of a successful out-of-court restructuring plan?

SPEAKER_03 11:49

You want me to just give you the odds? It really it's Neil, it's really dependent on the case. You know, I mean it it's it's yeah, we've done tons of them, you know. I mean, they they like I said at the outset, you can do out-of-court pretty much anything you can do within a bankruptcy if you can get everybody to agree. The problem usually comes in where the creditors have lost uh the trust of the borrower. You know, if they think that they're not being treated fairly, that they think that they're hiding things, they think there might have been fraud, um, so we can't trust anything that's coming at it. That that makes it hard, you know, because you know, once you lose trust, uh you it's very hard to get anything done. But if it but if you have pretty good communications and it's a situation that's uh a downturn in the cycle, and uh you know, you have you can convince them that the company can bounce back, you're showing them all the details as to why, and they're taking that information you give them and they're going to their higher up saying, Should we should we go along with this or not? And you can convince them that the recovery they're gonna get doing it this way is greater than if we filed a bankruptcy, then yeah, you got a pretty good chance of it of it happening. I mean, uh, you know, it's really uh a negotiation and convincing uh the stakeholders that you know this is gonna work better than if we file a bankruptcy.

SPEAKER_02 13:09

But is an alternative to a bankruptcy filing expensive?

SPEAKER_03 13:14

It can be. It depends on the size of the case and and how many professionals are working it. I certainly think it would be less expensive than a filing of a bankruptcy, for sure. You're gonna need counsel, you're gonna you may need some accounting professionals, you know, you need your restructuring guy. Um so you are gonna be paying professionals that you wouldn't normally be you know spending money on. Um, but it certainly would be less expensive than if you did it within a bankruptcy, in my in my opinion.

SPEAKER_02 13:41

Well, we've covered a lot in this episode. Maybe uh a summary would be in order. What are the major benefits of an alternative plan versus a bankruptcy filing?

SPEAKER_03 13:53

Well, from my perspective, it's less expensive. Um, number one. I also think there's less of a stigma, you know, in terms of uh the market seeing that you didn't have to file a bankruptcy um to reorganize the company. You did that outside of a bankruptcy, so you don't have the stigma of that. Um you know, and I think it's a better recovery for um for most of the stakeholders. Um I think you should always try to do it without having to file a bankruptcy. You should always at least attempt it.

SPEAKER_02 14:25

Steve?

SPEAKER_01 14:27

Well, one major benefit, which I guess is connected to what Nick was saying about the stigma, is the customer or consumer confidence in the company or the product. If you have a, let's say, a furniture company uh where somebody has to order a couch, which they're not going to get for three months, they're not likely to put down a deposit if the company is in bankruptcy. On the other hand, if the company's not in bankruptcy and they're just working out their issues, number one, the customer may not even know about it.

SPEAKER_03 15:04

I would say, look, you know, call somebody up, call your attorney, call your accountant. I'm sure they'll network you to somebody who can help out the company and see whether or not, you know, you can get through it or not. Just like you would go to a doctor.

SPEAKER_00 15:18

Do you have a question about bankruptcy? Why not ask the experts? Emails for Neil and Steve can be found in the show notes below. And remember, the first call is always free. Call Neil at 940-808-9451 and Steve at 973-286-6713. You can also find more resources on our websites. Go to corporatebankruptcy a Z dot com or elementarybusiness.com. You can also find links to those in the show notes down below. Corporate Bankruptcy A to Z podcast and YouTube channel are produced by me, Sir Isaac Smith. Be sure you subscribe and share the episode, and we will see you next time.