This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ).
The phrase "Chapter 11 bankruptcy proceeding" is NOT a lender friendly phrase. Chapter 11 is a bankruptcy where the borrowerdebtor intends to reorganize itself, right-size its balance sheet and then emerge from bankruptcy as a viable business. For the secured lender, this means danger, danger, danger: watch out, because one of the primary objectives of the borrowerdebtor in a Chapter 11 is to shed itself of the loan, or to modify the terms of the loan.
FAQ #47 – What should I consider if the borrower files a Chapter 11 bankruptcy?
- Chapter 11 requires a secured creditor to diligently monitor all aspects of the case because the Chapter 11 process can involve many different challenges and options to the secured creditor. The secured creditor will need to analyze many factors depending on what the debtor seeks to accomplish in Chapter 11.
- The Chapter 11 case can involve a reorganization through the plan process or a sale of some or substantially all of the debtor’s assets. Depending on the facts and circumstances involved, the secured creditor will need to evaluate its options and seek to exert as much leverage as possible to maximize its recovery.
- The debtor in possession ("DIP") financing process can provide an opportunity for the secured creditor to exert leverage and gain a position of control in the Chapter 11 process.
- Collateral valuation issues can also play an important role in the secured creditor’s position and strategy in the Chapter 11 process.
- Additionally, depending on the circumstances, a secured creditor can also seek to exert pressure in the Chapter 11 process by seeking stay relief, dismissal, or conversion of the case to a liquidation case under Chapter 7, or the appointment of a Chapter 11 Trustee or examiner.
To read the entire Tough Times FAQ series, please click here.
Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.
If you have thoughts, suggestions or questions on this topic, please post a comment below.