User:BenRininger/Debt restructuring

A bankruptcy court in the UK, circa 1900. Debt restructuring is considered a last resort before more expensive forms of bankruptcy—a last chance to negotiate one's debts with creditors.

In Various Jurisdictions

United States

Among the most common forms of in-court debt restructuring for firms in the United States are Chapter 11 and Chapter 12 bankruptcy.

Under Chapter 11, firms form a plan to reorganize their credit obligations, such that they are able to continue operating while they are going through with their debt repayment plans and after they become solvent. Creditors are given promises to be paid back with firms' future earnings. The nature of these promises can be shaped in a number of ways. In situations where every single impaired creditor of a firm agrees to a settled schedule of repayment, the plan formed is known as a "consensual plan." When a certain class a firm owes does not accept a restructuring plan, said plan may still be approved pursuant to the United States Bankruptcy Code. Such plans are colloquially referred to as "cramdown plans." Chapter 11 is considered to be one of the most expensive and complicated forms of bankruptcy to file. The vast majority of Chapter 11 bankruptcy cases filed end up allowing company management to go forward running the business as usual; however, in certain exceptional cases (fraud, gross incompetence, etc.) the courts do not allow the business the privilege of simply maintaining a "debtor in possession" status. In said cases, a trustee is appointed by the court to run the business until all bankruptcy proceedings are completed.

Chapter 12 Bankruptcy is a form of debt restructuring in the United States available to farms and fisheries exclusively; said businesses could be family-owned or owned by corporations. The special debt restructuring rights accorded to farmers and fisheries consequent line 12 of the United States Bankruptcy Code were first granted by Congress in 1986 amid an agricultural debt crisis. Food commodity prices were caught in a downward spiral in the years leading up to 1986, pushing U.S. farmers' debts to levels above $200 billion. This 12th line of the U.S. Bankruptcy Code was initially added only as a temporary measure and remained as a temporary measure until 2005, when it became permanent. Chapter 12 was of great benefit to farmers, because Chapter 11 was often too expensive for family farms and generally only useful for sizeable corporations, while Chapter 13 was mainly of use to individuals attempting to restructure very small debts. Farms and fisheries, being midsize and seasonal in nature, were thus in need of a more flexible legal framework through which they could restructure their debts.

Firms in the United States are not limited to only using the legal system to manage debts they are incapable of repaying. Out-of-court restructuring, or workouts, constitute consensual agreements between firms and their creditors to adjust debt obligations, mainly for the purpose of evading the costly legal fees associated with Chapter 11. The decision as to whether to enter a workout or take the issue into court is, in large part, a function of the creditors' and debtors' respective perceptions of how much can be gained or lost through a Chapter 11 proceeding. Creditors know that once Chapter 11 has commenced, a degree of negotiating leverage is lost, as judicial authorities may impose alterations of claims without regard to creditors' consent. On numerous occasions, merely throwing out the threat of filing bankruptcy has initiated the process of coming to a private agreement.

Canada

Two common avenues for restructuring debt exist in Canada: a Division 1 Proposal and a CCAA filing. The former is available to both corporations and individuals who owe $250,000 or more to creditors. The latter is available only to larger companies owing more than $5 million to their creditors.

A Division 1 Proposal is a last resort. Created by the Bankruptcy and Insolvency Act of 1985, the option to file Division 1 is not an option to be taken lightly as, in the event that the stipulations within the proposal get voted down by creditors or not signed off by the court, one falls into bankruptcy. Division 1 proposals allow companies to be briefly relieved of lawsuits by creditors, as well as they allow companies to stop paying money to their unsecured creditors while the proposal is being reviewed. A Division 1 Proposal to restructure debts must secure 66% of the creditors' votes set in proportion to how much they are owed, and 50% plus one of all creditors votes in terms of number of creditors. On top of such democratic approval, the court itself has to approve how the debts get restructured. Withstanding all such approval, a business or individual can continue operating as normal; otherwise, a business or individual is obliged to proceed into bankruptcy filing.

CCAA filings were created by the Companies' Creditors Arrangement Act, a piece of legislation first put forward and passed in 1933 and updated later in 1985. A CCAA filing allows a Canadian company to have a window in time (typically between 30 and 90 days) in which they can renegotiate and reorganize their debt payment plans with creditors. During this brief period, creditors cannot seize any money that is owed to them. These windows of time may be renewed multiple times over. Once a CCAA application gets finally rejected, the company in question can be forced into receivership or bankruptcy. This could happen for a number of reasons, chief among them being a failure to come to an agreement with creditors as to how to restructure the debt.