Bankruptcy can be a valuable tool for companies struggling with insolvency. It is also costly, difficult, and potentially damaging to the company’s long-term prospects. As a result, many Florida businesses opt to pursue alternatives to bankruptcy, especially in the current choppy real estate market.
Most businesses that choose to pursue bankruptcy file under Chapter 11. This United States Bankruptcy Code chapter permits “reorganization” cases, allowing filers to retain assets and stay in operation. However, they must agree to sacrifice certain rights, such as borrowing additional money without court permission. Furthermore, they usually need to liquidate assets or shrink their operations, which can impede the company’s ability to recover.
The best way to avoid these negative outcomes is to take action before bankruptcy is the only option. If you own your own business, you may be able to use one of the following bankruptcy alternatives to recover without the demands and restrictions of going bankrupt.
Recovery Plans
The simplest way to get a business back on track is to consult an outside expert and develop a recovery plan. This plan is a roadmap for your company to return to solvency.
Every recovery plan should be tailored to its specific business and situation. However, the general process of recovery planning is similar across industries. You’ll consult with a dedicated commercial attorney to do four things:
- Identify the legal threats, liabilities, and challenges your business faces. These issues may include debts and loans, negative market conditions, and poor product-market fit.
- Outline your company’s strengths and market opportunities. Every business has something going for it – you’ll identify the things that make it valuable and brainstorm potential growth opportunities.
- Analyze the threats and opportunities to determine your priorities. If your company struggles with cash flow, you may prioritize bringing in revenue over paying off debts. However, if you’re at risk of your liabilities outweighing your assets, you may focus on restructuring your debts. Your lawyer will help you identify your most pressing legal concerns.
- Create an actionable plan to avoid insolvency and improve cash flow. With this analysis complete, you’ll build a detailed and actionable plan that you can follow to return to normal operation.
This is similar to the type of plan you’d produce during bankruptcy, but without the restrictions or legal obligations it entails. If you identify that your business is struggling early, a recovery plan may be all you need.
Receiverships
A receivership is a court-appointed tool allowing a company to continue operations in distress. In 2020, Florida revised its receivership laws to codify the process. During a period of receivership, the court will appoint a trustee who will be in control of the business’s assets and operations for the duration.
This person must be a neutral third party without previous connections to the business to ensure they do not have prior attachments or biases about its operation. The company’s leadership remains in place during the receivership, but the trustee has ultimate authority. They have several jobs:
- To protect assets owned by secured creditors
- To address operational problems and structures that are causing the company to struggle
- To return the company to profitability
If your business has struggled to implement a recovery plan, a receivership may be a good next step. It demonstrates dedication to resolving insolvency issues and reassures creditors that their secured assets will remain safe, potentially delaying legal action against your company. Additionally, it puts a single person with fresh eyes and experience in charge of operations, which can be invaluable if internal politics or partnership disputes have played a role in the company’s struggles.
Assignments for Benefit of Creditors
Another option before committing to bankruptcy is an assignment for benefit of creditors (ABC). This is a voluntary alternative to bankruptcy that involves liquidating assets.
The company works with the court to set up a trust to liquidate and distribute assets to creditors. It then transfers all of its assets to that trust, where a trustee will manage the process. Any remaining assets are returned to the company.
While this is the most serious bankruptcy alternative, it has several benefits:
- Compared to bankruptcy, it is subject to significantly less judicial oversight.
- ABCs typically leads to less negative publicity than bankruptcies.
- Unlike a receivership, the business may choose the trustee, so there is more control over their decisions.
- ABCs permit other companies to acquire the struggling business’s assets without assuming liability for its unsecured debts, increasing their value and making purchases more likely.
While it may not be the best solution for every business, an ABC should at least be considered before committing to going bankrupt.
Discuss Small Business Bankruptcy Alternatives With EPGD Business Law
If your business is struggling, bankruptcy is far from your only solution. Before you make any permanent decisions, you should discuss your situation with the experts at EPGD Business Law. Our skilled business attorneys can help you determine the best way to keep your company operational while resolving debts and liabilities. Schedule your consultation with our attorneys in Miami, FL to kickstart your journey back to profitability.
