Reading Chapter 11 bankruptcy statistics and analyzing them is just not enough. The statistics do not guarantee that a company will successfully reorganize its business nor do they indicate whether the company will file for a Chapter 22 bankruptcy if it fails to successfully execute its reorganization plan under Chapter 11.
So, Chapter 11 bankruptcy statistics are an incomplete and unreliable statistics. There is no guarantee that a business who files for Chapter 11 bankruptcy will successfully execute its reorganization plan and emerge as a going concern. If the business seeks another restructuring after a short while (from the date of filing the Chapter 11 bankruptcy), then it can be said that the Chapter 11 plan has not worked in its favor. There is a score – Z-Score – that is applied to test a business’s post-bankruptcy scenario, and if the company fails to achieve this score, the creditors can reject its reorganization plan.
The worst thing that can happen in a Chapter 11 bankruptcy is that a business defaults on its reorganization plan and files for bankruptcy again under Chapter 22. Chapter 22 and Chapter 11 bankruptcy statistics, when read together, do point out that only 32% of businesses who filed for protection under Chapter 22 succeeded. The rest failed and the majority of the businesses that failed cited operational problems.
So, when one looks at Chapter 11 business bankruptcy statistics, all one can predict is that maybe 40% to 50% will succeed while the rest will jump into Chapter 22 bankruptcy, which should be avoided as far as possible. It has been discovered that many businesses fail Chapter 11 bankruptcy because of two important factors – the business’s large size and the reluctance of lenders to finance a debtor-in-possession business.
This is why it is important to make the reorganization plan as practical as possible. It requires concentrated efforts of financial advisors, lawyers and the business owner to draw up a reorganization plan that works. The truth is that today the economy is passing through a depression. Asset values are dipping and even though the interest rates are down, lenders are reluctant to extend credit to distressed businesses. This makes it even more important for a business to explore multiple debt-destressing options even before filing for a Chapter 11 bankruptcy.
It is better to work with a rock solid reorganization plan that includes creative repayment strategies and emerge successful instead of being just another number in Chapter 11 bankruptcy statistics.
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