90 Second Lesson: Is Bankruptcy Needed if Creditors Will Just Agree to Take Less?

QUESTION:

Murray D. emailed, recently: “I am a general corporate lawyer. One of my clients has been in business for 50 years. It has no bank debt but it owes its vendors about $2 million. He told me that most or all of his vendors are willing to work with him by writing some small amount off and agreeing to be paid the rest over time. Can we do this without bankruptcy?”

ANSWER:

Murray, based on what you describe, the answer may very well be yes. You should consider a “composition agreement,” which is an agreement made between a debtor (in this case, your client) and two or more of its creditors whereby each of the creditors entering into the arrangement agrees to be paid a specified amount, possibly on a deferred schedule, in full satisfaction of a greater amount that is owed to them. This tool is not uncommon. It is also not spoken about much because, unlike bankruptcy, it doesn’t involve any court and is totally private between the parties.

[Editor’s Note: This 90 Second Lesson is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it. This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.

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