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Loan Workouts

A loan workout is a process by which creditors of a financially troubled business agree to concessions in order to permit the business to remain in business rather than liquidate and dissolve. It is critical to the process that the creditors come to an understanding that they will be better off financially if they revise their repayment expectations to enable the business to remain a "going concern." A workout can occur through informal negotiations and concessions or pursuant to a Chapter 11 bankruptcy reorganization.

Most workouts are initially handled in an informal manner, and many remain in that mode throughout the workout process. The informal workout is characterized by negotiations and discussions among creditors, investors, and representatives of the debtor company without the filing of a bankruptcy or the commencement of lawsuits.

The crucial first step, which is essential to the success of an informal workout, is an agreement by the creditors to a stand-still agreement whereby creditors agree to take no action against the debtor or its assets for a stated period of time. Where a debtor's financial problems are solely due to a cash flow problem, a stand-still agreement may serve to solve the problem without the need for further concessions.

Following the agreement to a stand-still, the creditors may be able to negotiate a composition agreement whereby they agree to discount the amount due to them. An extension, which gives the debtor more time in which to repay the debt, can be used in conjunction with a composition. It is important that the agreement reached be reduced to writing in a workout agreement.

Even where composition and extension negotiations do not result in a unanimously agreed upon workout plan, they often pave the way for a Chapter 11 bankruptcy proceeding through which a binding plan will be imposed on the few remaining reluctant creditors. Therefore, an unconsummated informal workout followed by a Chapter 11 bankruptcy filing does not necessarily constitute a failure or a waste of management time and resources.

A Chapter 11 bankruptcy is a proceeding in which the debts of a business debtor are realigned to permit the debtor to remain in business and pay off its debts under more advantageous terms. A Chapter 7 bankruptcy, on the other hand, results in a liquidation of the debtor business to satisfy as much of the debt as is possible. Creditors must be mindful during a prebankruptcy workout of the effect a Chapter 11 or Chapter 7 bankruptcy filing would have on any agreements made during the workout.

A Chapter 7 liquidation or a Chapter 11 reorganization is commenced by the debtor's filing of a petition in bankruptcy. In some cases, creditors can initiate an involuntary bankruptcy proceeding. By virtue of the filing, creditors are prohibited from taking further action to collect the debt. This is referred to as the "automatic stay."

Creditors can obtain relief from the stay to force the debtor to assume or reject leases or to recover property that is not necessary to an effective reorganization. To obtain relief from the stay for these purposes, a creditor is required to bring a motion in bankruptcy court.

After the debtor's debts are ascertained, a Chapter 11 plan is presented to the bankruptcy court for approval. Creditors are entitled to appear to object to the plan or suggest modifications. If the plan is approved by the bankruptcy court, it constitutes the debtor's workout plan. If the debtor does not live up to its obligations under the plan, creditors can bring a motion in bankruptcy court to have the bankruptcy converted into a Chapter 7 liquidation.

Form: Sample Financial Statement

To read and print out a copy of the Form please link below.

Sample Financial Statement

You can download a free copy of Adobe Acrobat Reader here.

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