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Pre-Packaged Chapter 11 Plans: Don't Try this at Home, Kids!

By Joseph McDaniel, Esq.

Giant Chapter 11 Bankruptcy cases are not like mom-and-pop cases. They're more like exotic trips to the planet Krypton, where things happen in different ways than they do around here.


MGM now has a bankruptcy plan which will probably be approved soon.

But you can tell the difference between a paltry few million and a few billion with a b by looking at the amount of lawyer time that is expended in a mega-case.

And on this point, you should probably trust me; a billion with a b is a LOT more debt than a million with an m.

Chapter 11 bankruptcy cases, if they are planned effectively, are remarkable tools that can obtain remarkable results.

But they are not well-designed for a corner grocery, or a hair salon.

The reporting requirements and the professional fees can easily squash such a small business flat.

There are no perfect alternatives for a troubled business; a Chapter 7 doesn't normally involve an operating business. A Chapter 13 is only for people, not for corporations or partnerships or limited liability companies, and it has modest debt limits located at 11 USC 109 of the Bankruptcy Code.

That leaves....well, nothing. But the ultimate value of bankruptcy when there's a negotiation going on is pretty simple.

A set of fully filled out bankruptcy schedules leaves no doubt about how the story is going to end, so it becomes a remarkably effective show-and-tell device in a hot discussion of alternatives between a creditor and a business debtor.

In a discussion with an economically rational business creditor, all you have to do is to demonstrate convincingly that there's more dough, faster and surer, in the deal that's being offered to the creditor.

In that sense, it's not complicated.

But business creditors are by nature suspicious, and they have reason to be, and getting them to accept money is not always as easy as it could be; hence, the use of bankruptcy schedules as a show-and-tell exhibit.

An experienced creditor knows how to read bankruptcy schedules, because he's seem 'em before, and he knows the drill after one gets filed.

Sure, he may get paid, or he may not. But things for him come to an abrupt stop, because of the automatic stay, and the distribution of the proceeds of the estate occur at a stately pace, because bankruptcy trustees are very busy, and very careful.

Now, why would a creditor ever be "economically irrational"?

After all, that would be....irrational, right? 

We'll talk about that soon; it involves something I like to call "emotions".

Full post as published by Arizona Bankruptcy Attorney Blog on November 05, 2010 (boomark / email).