Rushed liquidations may cost creditors billions of dollars annually. Restructuring and reviving businesses instead may be better for everyone. Chapter 11 protects businesses and helps get them a fresh start. Through Chapter 11, creditors can recoup most of what they lost. More businesses face liquidation instead of restructuring in Texas.
Liquidation runs rampant
One case study includes 503 nonfinancial companies with over $50 million in debt from 1987 to 2018. Businesses in the study were seeking Chapter 11, like other larger companies. Large businesses favor Chapter 11 when restructuring or liquidating the company. Some assets can lose value the longer bankruptcy goes on. The study saw bankruptcy judges favoring liquidation over restructuring.
Managers push for liquidation
A reason for the trend of bankruptcy judges favoring liquidation over restructuring is having external managers involved. Senior creditors hire external managers to help businesses through Chapter 11. The managers often persuade judges to approve an asset sale.
A hasty asset sale hurts junior creditors, employees and customers, but the sale helps the senior creditors recover part of their money. Judges may grant liquidation without creditor constant after managers prove business justification. The faster a sale happens, the less a melting asset will lose.
Restructuring is less costly
Rushing a bankruptcy is short-sighted for every party. A creditor could earn 52 cents on every dollar owed after a business restructuring, and 60% of creditors lose more than that after a business liquidates assets. Creditors also lose money after another company acquires a bankrupt business, up to $2 billion per year through missed opportunities.
Any size business may perform well after a reorganization. Creditors would benefit from agreeing to lower a business’s debt load. The business’s equity could be more valuable after negotiating, so creditors could negotiate equity stakes as a form of payment.
Outside managers should meet with key creditors before heading to the bankruptcy court, and creditors should have a restructuring plan before heading to the bankruptcy court. While liquidation is faster, it’s not always the best option.