Corporate Debt Consolidation vs. Bankruptcy

When a corporation is becoming insolvent (income insufficient to meet its obligations), like an individual, one option is to file bankruptcy. Another option is corporate debt consolidation. Which is more advantageous depends on the situation.

Corporate Bankruptcy: Chapter 7 or Chapter 11

Like individuals, corporations can file Chapter 7 (Liquidation) bankruptcy, in which the bankrupt entity's assets are liquidated and distributed to creditors, after which any remaining debts are discharged (eliminated). Since liquidating assets can often result in a business becoming nonviable, as it involves giving up property, equipment, and inventory, Chapter 7 is often the last act in the corporate drama. While a business does not have to shut down after filing Chapter 7,  it often does--or even if it does not, what emerges from bankruptcy often has little resemblance to what went into bankruptcy.A less-drastic alternative to Chapter 7 is Chapter 11 (Reorganization). Chapter 11 is the more-or-less equivalent of an individual's Chapter 13 filing. Debts are reorganized, which often means a reorganization of the business itself, as corporations are defined in large part by their capital (financial) structure; and a payment plan will be developed, under which the corporation will pay a portion of its debts over time. Chapter 11 allows a business to keep running while dealing with its obligations, but because Chapter 11 requires a viable business, corporations in extreme financial distress may be unable to qualify.

Corporate Debt Consolidation

Corporate debt consolidation is often called refinancing. Similar to an individual's debt consolidation, the idea is that one (or more) new loans or other forms are debt are taken out and used to pay off the debt that has been causing difficulty. In essence, "bad debt"---whether it's bad because the principal amount is coming due, or the interest rate or monthly/quarterly payment is too high--is replaced with "good debt."As a general matter, consolidation will often increase the total indebtedness, since there will be various administrative, origination, legal, and accounting fees connected with the consolidation and obtaining new debt. Its main virtues are (1) that it can lower the payments due on a debt and/or extend the time to pay; and (2) it can be done unilaterally--as long as the corporation can find the financing, it does not need anyone's permission to do this.

Bankruptcy or Debt Consolidation?

IF debt consolidation will actually help, it's probably the better option. Among other things, it avoids putting the business under bankruptcy court scrutiny and control, or giving creditors a voice in making corporate decisions. It also avoids the stigma and damage to a company's credit rating that comes from bankruptcy.However, if the consolidation won't make enough of a difference, it's probably better to go directly to bankruptcy. If consolidating debt will still leave a company with obligations it cannot meet, there's no point in incurring the cost of consolidation.

How an Attorney Can Help

Dealing with corporate debt is very complex. The company needs to make sure it complies with all terms and covenants under all its different debt agreements; it also needs to analyze complex areas of the law (Chapter 11 is arguably the most complex type of bankruptcy) in weighing its options; and it also needs to take tax considerations into account. An experienced corporate bankruptcy attorney is invaluable when deciding how to handle excessive debt and corporate financial crises.