Business Improvement Group

Services > Out of Court Liquidations

An alternative to the expensive and lengthy formal bankruptcy procedures administered by the U.S. bankruptcy courts is a process commonly referred to as "out-of-court settlements."

A company can use it instead of Chapter 7 liquidations or Chapter 11 restructuring. The benefit to creditors is that they can receive their payouts much faster than in a formal bankruptcy process.

Credit professionals should be aware that there are still costs associated with this type of transaction. Lawyers are hired to negotiate with the debtor and structure the transaction properly. Accountants are utilized to value the assets and the potential payout to the unsecured debtors for any pre-petition debt.

Out-of-court settlements are used in the following situations:

• If a large percentage of the debt is held by a small number of creditors; and when there is a limited number of land-lords involved, especially if rent has not been paid.
• The debtor needs to reveal the extent of its financial problems. It must make a complete disclosure of its assets and cash on hand. With this information the accountant should be able to quickly formulate a report that can be used to negotiate a fair liquidation or restructuring plan.

If it appears that the debtor is anything but completely honest, creditors should re-evaluate their decision to go along with an out-of-court settlement instead of the formal bankruptcy process. The debtor should keep creditors updated about its financial progress throughout the negotiations. Under the right circumstances, out-of-court settlements offer the best resolution to both the creditor and the debtor in unfortunate financial circumstances.