While it can be an effective tool, the price to file for bankruptcy is costly. Just the retainers for professionals in a small case could be substantial, as the debtor often needs both an attorney and financial advisor. The end result can easily be in the region of $500,000 to $1,000,000. There is also the emotional aspect of the owners appearing in court and publicly disclosing monthly financial information. In addition, the majority of companies filing Chapter 11 do not come out of Chapter 11 if they do not have an exit strategy, versus a pre-pack, whereby companies already have a plan and decide that it is best to consummate the plan with the protections Chapter 11 provides.
An alternative to Chapter 11 is a composition agreement, which is an out of court restructuring plan. Unlike Chapter 11, where voting creditors must cast a 51 percent vote in number and 67 percent in value to confirm a plan, the company determines the percentage vote it needs in order to have a successful reorganization. Having said that, it is not advantageous to the company to go for a low approval as explained further in the “Vote” section below. Otherwise, composition agreements typically adopt similar rules and regulations to a Chapter 11 proceeding.
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