It's a huge difference. IMO Chapter 11 bankruptcy is one of the greatest strengths of the American legal system.

Generally agreed, but as a small business vendor on the wrong side of this it’s very painful.

During Covid, a client representing 20% of my income declared bankruptcy after already waiting > 6 months for a group invoices to be paid.

They’ve offered “secured creditors” nearly full repayment, while everyone else has been offered literally 1¢ on the $1.

It’s a painful lesson to learn but the key here odd to recognize when someone is a sufficiently large customer than a default represents an existential risk to your business.

Businesses tend to go the other way and be more accommodating to larger customers like continuing to fulfill their orders and not taking action at, say, 90 days late.

Secured credit can be one way to resolve that without being super strict on late payments or wanting repayment of limited credit.

There's insurance that covers this - no idea whether it's a good value but it certainly exists.

Here's an example: https://www.nationwide.com/business/insurance/accounts-recei...

We don't do work with folks with a past due invoice. It works well. We can't engage on the next engagement until you pay the prior.

The folks who slow pay are a paint to deal with overall I've found, so no big loss when they go. Or you don't get paid, which is even worse! And yes, they will slow pay anyone who lets them.

What are the quick pro/cons here? Assuming creditors take the loss (they assumed the risk), debtor loses the debt and what else? Do the debtors lose much besides their creditworthiness? The main con I assume is the moral hazard?

Chapter 7 means liquidating all assets - business gone, creditors can pick over the pieces to try to recoup something. Chapter 11 business is functioning and tries to restructure debts in a way to pay creditors back, maybe not wholly back but at least partly or with an extended time window. It provides a shield from creditors while doing this.

For someone like Alamo so adversely affected by Covid but with an otherwise (AFIACT) healthy business in non-covid times its a reasonable approach to try to get out from under-water without undue pressure from creditors.

You see Chapter 11 more around extraordinary operating circumstances, recesssions etc. Where businesses think they can get back on their feet given some time.

One of the big items in Chapter 11 is terminating expensive long-term leases. Since Alamo probably has this as their #1 or #2 expense, they can close locations without being on the hook for future rent.

I'd also expect that this would provide some leverage in renegotiating expensive leases, particularly given the hit commercial real estate has taken during the pandemic. I'd bet many landlords are willing to take a lower paying tenant already in a space, vs trying to fill that space in a low demand market.

I've read elsewhere that while this seems logical, it often isn't possible for commercial landlords as their loan terms are tied to a given rental price.

This right here is why i've been less and less enthusiastic about some of the roles credit plays in our society. You get credit assuming the future will be in some range, but then you can get screwed if it deviates. So now you have to fight for it to stay that way, and when shit hits the fan, there's this long chain of dependencies that needs to unwind to allow flexibility. Like it's trading robustness for efficiency.

Yes but efficiency is pretty valuable since we have limited lifespans. Providing the capital to start a company (or build new housing/apts) now rather than in 10-20 years probably does more good than harm overall. It's definitely a balance though, very easy to go overboard.

This is rather dependent on the landlord, obviously, but the actual rental price is often just one component of the overall cost of a commercial lease. In addition to rent, stores often pay fees for common area maintenance, security, etc., and negotiating on these fees is much easier. Depending on the state and legal situation, some landlords actually own liquor licenses that they rent to the lessee for restaurants or bars for a fee.

There's a lot of stuff that can done to reduce the costs of a lease beyond just rent reduction.

Does this lead to landlords keeping the space empty than lowering the rent?

I can't find the article, but supposedly yes. IIRC the reason was that the landlord's loan terms are dependent on the income from the building, but that number doesn't recalculate until a new tenant comes in, so accepting lower rent can trigger a large cash call.

Ayup. In addition, the revenue from a missing tenant can often be added to the end of the mortgage.

I've seen retail space in amazingly hot markets be empty for 5+ years now.

The main "pro" of a successful Chapter 11 is that a viable but struggling business is saved (along with the jobs provided by the business), although the investors in the business may see their investment wiped out. As mentioned elsewhere, being able to pick and chose which leases to assume and which to reject is one of the principal benefits. The main "con" is that unsecured creditors don't necessarily get the deal they agreed to, but (a) the claims of even unsecured creditors are prioritized over equity, and (b) bankruptcy is a known risk for unsecured creditors, and is presumably priced into the debt in the first place. Also, while a Chapter 11 is not going to help a company looking for cheap debt, there's a whole industry of providers of credit to Chapter 11 debtors. As long as there is a viable plan to reorganize, the company should be able to find financing or otherwise emerge with a functioning business.

Depends on how the restructuring occurs, the debtors usually lose some or all of their equity. Unless the restructuring makes the creditors whole, the previous shareholders don't retain any ownership. The entity survives, but the old stock is voided and new stock issued.

Chapter 11 usually happens when a company has a level of debt that was issued at a certain valuation or time in their business performance. And then for whatever reason, the company has poor performance and the debt level no longer makes sense. Good example is oil and gas companies that raised debt when oil was $100, and now have to operate in a ~$50 oil world. Their operating cash flow has decreased a ton (>50% due to fixed costs), and it's unclear on whether they can make interest payments (and probably can not repay their principal).

The equity will clearly not make any money and the business does worse in the long-run which presents more risk for more junior creditors (the company can not re-invest in growth, business contracts are more onerous as you have credit risk, low morale w/ employees, etc.).[1]

But Chapter 11 is not something a company can do at anytime. You have to prove that the restructuring of the equity and debt makes sense to either (1) your shareholders and creditors or, if that fails, (2) a judge.

Additionally, employees and the board will have equity that will get cancelled or receive pennies. So if it's marginal on whether there could be equity value someday, the company is not going to do it. On the flipside, it's pretty frustrating if you can't issue stock options that will have value someday.

Overall Chapter 11 bankruptcy is a great thing for business... it allows companies to breathe again and re-invest in growth. As far as cons...obviously the equity investors and maybe some of the creditors lose a call option on their investment (not worth anything today, but could be in the future). But that call option may be compensated for in the restructuring agreement. But the biggest con IMO is that Chapter 11 is expensive, and usually bankers / lawyers make outrageous fees here.

That was a lot and sorta of scattered. But if you see "Chapter 11" bankruptcy you shouldn't always think "this business sucks" or "this business doesn't make a profit," but should put more blame on a financier somewhere who created a capital structure that wasn't sustainable.

[1] The company may also have upcoming maturities in more junior debt, and the more senior creditors don't want them to pay the principal. Liquidation preference is a good search term if you're interested in this.

Edit: Also worth noting that creditors don't always take a 0. Sometimes their debt is reinstated, sometimes they receive equity for their debt, and sometimes they receive pennies just to get them to agree (cheaper and faster for everyone to agree than to have a judge decide). All depends on the valuation of the business and where their debt sits.

>Chapter 11 usually happens when a company has a level of debt that was issued at a certain valuation or time in their business performance. And then for whatever reason, the company has poor performance and the debt level no longer makes sense. Good example is oil and gas companies that raised debt when oil was $100, and now have to operate in a ~$50 oil world.

That's intended as a good example (in the sense of "clear, characteristic")? I thought oil extractors were expected to hedge or buy financial instruments that ensure they'll be able to sell at a good enough price given a project's costs. And even if not, it doesn't seem accurate to call that a case of "poor performance" but rather, external factors.

Chapter 11 generally involves a payment plan to debtors.

The business does. The individual doesn't. If that were the case, literally every business would be unlendable. Did you ever stop to wonder why commercial entities don't have a credit system? Commercial loans are devised based off of the old fashioned way lending was done. Look at several years of your income and financial discrimination on your risk.

> Did you ever stop to wonder why commercial entities don't have a credit system?

Isn't that what Dun and Bradstreet is for smallish businesses and Fitch, Moody's and S&P do for businesses issuing bonds?

Yes, not every business is in D&B, and it takes effort to get a record there, but it's not as if there isn't a commercial credit system, it's just not so engrained into everything like the consumer one.

I don't know exactly what "credit system" means here, but the only difference I see is that certain types of lending are so low risk or low amount, that lenders find it possible to automate the job via the use of the credit reporting agencies, who (in the US) use social security numbers to summarize people's history of repaying debts.

For any sufficiently large transaction, even for a person, such as a home mortgage, there will be manual review of people's incomes and assets, just like there is for businesses.

Which other countries have an equivalent to Chapter 11?

In Canada, there are 2 functional equivalents. A Division I Proposal [1] is a means for individuals and businesses to resolve "unmanageable debt", with no minimum amount. For large corporations with >$5Mil in debt, the CCAA federal law is more advantageous [2].

[1] https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02052.html

[2] https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02284.html

Probably many. It is a standard way to re-structur the debt of something which might be a viable business in non-terrible circumstances.

Spain: “concurso de acreedores”. The business asks the Government for a way to have lenders (acreedores) restructure/redimension the debt.

This way workers can still have job in the future, assets keep their operating value...

Nothing like that in the UK afaik. In 2008 Lehman’s had their London office locked and everything frozen on the morning of the bankruptcy. The New York office was afaik still open under chapter 11.

Uk has the cva which is functionally similar

> For instance, Hertz is going through Chapter 11, but you'd never know as a customer.

For most cases yes. I don't know the exposure risk of Hertz in this regard, but in a Chapter 11 it's worth remembering that any people who are legally owed money (i.e. unpaid lawsuits) are counted as 'creditors', I think based on how the GM/Chrysler bankruptcies played out, 'unsecured' ones at that.