As a creditor, you or your organization may receive a request from a troubled business to consider a change to a prior contractual arrangement. If a business can show it has an ability to recover, it may ask that you consider its request as an alternative to filing for bankruptcy.
As reported by CFO.com, struggling debtors may request forbearance or flexibility on loan payments to help provide them with needed operating capital. This may provide a means for the debtor business to avoid a chapter 11 restructuring and bypass a possible creditors’ vote.
Approved agreement versus forced bankruptcy
A debtor may also submit an informal credit composition agreement outlining a settlement proposal. A business, for example, may request amending contract terms or selling its secured assets to use the proceeds for its operations. Without a vote of approval from a majority of its creditors, however, the proposed agreement may not stand.
According to Harvard Business Review, commercial debtors experiencing financial hardship may seek to negotiate out-of-court workarounds rather than file for Chapter 11 bankruptcy. Whether a business restructures its debt in or out of court, it typically requires approval from creditors. If a debtor cannot obtain a vote of approval, it may need to revise the proposed changes. When the creditor majority cannot agree to the revisions, a debtor may have no other option other than bankruptcy.
How a business may reorganize
Chapter 11 bankruptcy requires a debtor to submit a plan for reorganization; the plan may not, in certain cases, require a vote of approval from the majority of creditors. The court, however, must approve of the plan and may also prioritize secured over unsecured lenders.
As a creditor, you have a right to receive amounts owed under a contractual arrangement. Requests for modifications may require careful consideration or negotiation before forming new agreements.