Navigating Bankruptcy: Transforming Worries into Wise Choices with the Right Service Provider!
Hi, everybody. I'm Max Clark. I'm gonna talk a little about bankruptcy and what it means for you and how you can take advantage of it. In the US, there's 2 commonly known bankruptcies. So we talk about chapter 7 and chapter 11.
Speaker 1:Chapter 7 is liquidation. The company is being sold off in pieces for anything that has value left and whatever comes out of it is going back to usually debt holders. So, I mean, there's a preference stack with bankruptcy and who in the order people get paid. Right? So, lawyers, trustees, you'll see executive teams that were, you know, of our people that are are brought on to do the wind down, then secured bond holders, debt holders, you know, unsecured creditors, which usually include employees and and their payroll and benefits and etcetera.
Speaker 1:And, usually, by the way, unsecured creditors aren't really expecting to get anything in a bankruptcy process. Okay. I'm gonna get completely sidetracked. We haven't even started. So chapter 7 bankruptcy, bad.
Speaker 1:Things are done. It's it's just being sold off in pieces to try to get whatever value is left. Chapter 11 bankruptcy is reorganization. Chapter 11 is the company has gotten into a situation where if it wasn't for their debts and debt obligation or maybe some specific contracts or leases or some sort of structural issue the company would actually be viable going forward. What chapter 11 does is it allows the company to selectively keep certain contracts and reject other contracts, reorganize itself and emerge from chapter 11 bankruptcy, hopefully in a strong financial to move forward as a as a going concern.
Speaker 1:Now industry joke and especially when dealing with telco is, you know, telcos are not a real telco until they've gone through bankruptcy. You know? Step 1, raise a bunch of money. Step 2, overbuild your infrastructure. Step 3, b k.
Speaker 1:Step 4, come out of b k and and do some of those assets. So we have a lot of assets in the market today that are all wonderful viable things that all started from other companies that went through and put them in place and built them and then went through some bankruptcy and then were sold or or whatever. So this is this is a relatively common normal process. So chapter 11 in and of itself is not necessarily a scary thing. It depends on where you are in the process and what's actually going on that dictates a lot of what actually happens.
Speaker 1:I should make a quick note, on almost every single contract that you read in the United States. There is going to be a note that talks about in the event of bankruptcy that this contract is null and void. And let me just tell you, having been through customer bankruptcies as a service provider, there's absolutely no that that language always makes me laugh because the court decides what happens in bankruptcy with those contracts. So as a customer, if you have a service provider that declares bankruptcy, you cannot escape that process. There is nothing that you can have in that contract that gives you the right when that company is going through bankruptcy to stop paying them and to move on to another service provider.
Speaker 1:You are along for the ride and the same thing is true on the service provider standpoint. If you have a customer that goes through bankruptcy, you are along for the ride. Now now going through this as a service provider, I can tell you there's some other things that could be very interesting. And I'll just I'll kind of segue into this a little bit because it's it's it's relevant. When the bankruptcy is filed, let's just say you're it doesn't matter if it's we're talking customer service provider at this point.
Speaker 1:But when a bankruptcy is filed, first thing that happens is the court issues an automatic, restraining order. And that restraining order applies to all parties involved and and it triggers a whole bunch of automatic stuff in bankruptcy law. Things and this is called the and this begins what's called the administrative period of bankruptcy. If you're a service provider and you have a customer that files for bankruptcy, that date of bankruptcy is really important because it defines the preference period prior to bankruptcy. And what what preference is is it's a a period of time where there can be no preference paid to creditors and everybody has to get paid equally or everybody has to get screwed equally depending on how you look at it.
Speaker 1:So what that means is if you are a service provider and you have a customer that files for bankruptcy and you've received payments from them in that preference period, the trustee is gonna come to you and tell you to give them the money back. And this sucks. It really sucks. So now anything that they owed you prior to oh, wow. That's fun.
Speaker 1:Okay. Mac OS's reactions don't don't do those things. So anything that they paid you prior to bankruptcy is gonna get caught back within that window of time. And even they owed you prior to the bankruptcy is now flushed because of the bankruptcy, and you have to continue giving them service going forward. Otherwise, the bankruptcy court can do really horrible things to you.
Speaker 1:And by the way, don't mess with federal judges in the United States. It is not worth it. So same thing as a customer. Right? So in the customer standpoint, now this gets really fun because if you owed money before the bankruptcy of the entity, that now becomes the property of the of the bankrupt entity that the trustee has jurisdiction over, and the trustee will absolutely come after you to get you to pay them what you owe them.
Speaker 1:And by the way, the trustee gets paid based on money that they collect because that's how they're billing against the entity. So they're gonna make sure that you pay them, and they have no qualms in suing you to get the money out of it. So just understand that, you will be writing a check. And, again, if you don't, you're dealing with a federal bankruptcy judge, and you're not gonna have a good time. There's a third type of it's not bankruptcy.
Speaker 1:Certain states have a process called assignment for benefit of creditors. What an ABC is is it's a state, controlled wind down process of the entity. It is similar to a chapter 7 in the sense that the company dissolves when the ABC is filed. It is handed over to, to an agent to wind the business down. It immediately stops conducting business.
Speaker 1:It's done. When the ABC starts, the business is done. ABCs can be a cheaper, easier process for a business to go through and depending on certain, you know, structural issues, the way the business actually operates and where they operate and what kind of customers they are and what kind of business they are and what kind debt they hold. So this isn't a a conversation like which process to choose. So, in the pro in the course of bankruptcy, really a couple things happen.
Speaker 1:One of them is the company itself will submit a reorganization plan to the court, and it'll say saying things like, you know, this is our current financials. This is with our debt. This is what we wanna keep. This is what we wanna get rid of. If we do all these things, this is what become what happens to us.
Speaker 1:That's it's great. And at the same time secured creditors, you know, can impose secured rights on the business. Maybe they have stuff that actually says, you know, equipment is gonna be under secured right, for instance, or inventory could have secured rights, or it could be a a bondholder with with with preference and secured rights. The creditors get the ability to also make a proposal for the business. And that might be, you know, hey, we want the company in control of the company and in exchange for that we're going to, zero out the debt that the company owes us.
Speaker 1:There could be a, unsecured creditors could do it. There could be an outside entity bidding on the business, you know, because they want the assets. You know, there's there's there's different scenarios that could happen. And what the bankruptcy court supposed to do in the trustee is they're supposed to maximize the value again for the for the for the debt holders, you know, of the business. Right?
Speaker 1:How we maximize value of this this entity. So as a customer, bankruptcy is really interesting. It's interesting when you're selecting service providers because if you're a current customer of an entity that's going into bankruptcy, you've probably seen service degrade to a point that's pretty much unbearable. And if you're going through that, I empathize for you. It's just it's a terrible place to be because there's not much you're gonna get out of it.
Speaker 1:Now, hopefully, the bankruptcy is gonna resolve some of those issues. Maybe whatever segment you sit in is in segment that's that's that's, you know, dissolved and you can escape it that way, but maybe not. More than likely, maybe not. Now if you're in the process and why this has triggered this this recording, if you're in the process of selecting service providers and you're out in the market and you're looking for service, a potential supplier is in bankruptcy currently. That's something to kinda consider and think about and not from a a place of necessarily bad.
Speaker 1:I mean, you don't wanna be signing a contract with an entity that's still going through the process. You know, if you cannot wait for them to finish a bankruptcy process, advise you probably, you know, go with somebody else. If your timing works out, and this is why this is relevant. If your timing works out and you're talking about executing a contract for service or for for you know from that supplier and your timing would be post bankruptcy exit now you're talking about an organization that has shed its its debt its dead weight is going to be aggressively interested and looking for revenue think about that for a second this is an organization this will be a business that'll be aggressively looking for customers to grow revenue out of bankruptcy that gives you a lot of very interesting leverage when you are looking at and evaluating one versus another Leverage can be applied in lots of different ways. Leverage could be financials the first place a lot of people go to.
Speaker 1:Right? You can get better financial terms out of that service provider. I look, they just eliminated in theory, all of their debt. Right? So it's very easy for them to, you know, look at different economic scenarios for you when they when you're signing a contract.
Speaker 1:Leverage could also be contract, what's actually in your contract, protections that you have in the contract, things that normally wouldn't be able to negotiate in terms of maybe it's, better language around term, termination rights, triggering events, SLA metrics. I mean, you you you name it. Maybe it's a a structural issue with how the service is actually priced and and delivered to you financially. It could be leverage around, you know, access to team, what kind of resources they're gonna dedicate to you, who you're gonna work with from an executive sponsor, you what the scope of services you receive. I mean, the the examples here just kinda keep going on and on and on in terms of whenever you have a trading partner, you have a supplier here that really wants your business.
Speaker 1:Of course, that becomes the easiest time to interact with that supplier as a potential customer and as a prospect for them. Now, there are scenarios and and I've seen this happen where companies go through bankruptcy and they reorganize and it turns out they're not a going concern after the first bankruptcy. And this actually happened to me as a service provider where I had a customer go through bankruptcy, finish the bankruptcy process, and then within a year sign and go into a second bankruptcy that then turn into a chapter 7 liquidation. Pretty horrible experience to go through as a service provider in that case. And it'd be a really horrible situation to go through as a customer.
Speaker 1:The trick there is understanding what was their financials before bankruptcy? What was their, what was the drag on their business? What pushed them into bankruptcy? What happened as a result of bankruptcy? Who capitalized the business during bankruptcy or post, you know, coming out of bankruptcy, what their capitalization looks like going forward, what that puts them in market, how long your contract would be for them, how critical they are to you in terms of, you know, are they a sold single source vendor or a, you have the ability to have multiple multiple suppliers, you know, and and diversity.
Speaker 1:So there's less risk. So that equation really comes down to a measure of of where it sits in perceived risk or or or implied risk versus, potential leverage and outcomes that you can get for yourself as a customer of that supplier. If you haven't been through bankruptcy on either side of the table, you know, just the unknown makes it very scary after you've been through them. I don't wanna say that they're not bad to experience, but the predict about predictability of it of having the experience of going through it makes it you know the scary factor go down so now you're you're just it becomes more of a rational decision making process of how do you relate and how do you react to it there are lots of scenarios where it could actually be a great thing for you. It could be a great thing for you if you're the service provider and you're going through bankruptcy.
Speaker 1:It could be a great thing for you if you're a customer and one of your service providers. This sounds so insane to say and I get it and and you go ahead and flame me in the comments but this isn't necessarily a bad thing. You shouldn't look at it as necessarily a disqualifying event. If you're dealing with a company that's approaching bankruptcy and their financials are garbage and their stock is about to be delisted and you know it's coming and you have the ability not do business with them, I would say that period of time pre bankruptcy is it is a great time to not be signing a contract with somebody if you think they're gonna about to fail because you have no idea what's gonna actually happen, and there's no certainty in that process. Again, you know, if, they're about to exit bankruptcy and you can, you know, wait a couple of weeks for that to happen and then make a decision, I will tell you from experience that you could be pleasantly surprised as to what you could get out of it and and how good it actually could be for you before you sign the contract.
Speaker 1:So, you know, bankruptcies aren't necessarily bad or good. They just they are what they are and understanding what you're getting yourself into and how to deal with it and, how to take advantage of it, you know, can make a big difference for your business. Now, segue back on, you know, bankruptcies as a service provider. Look. If you're an unsecured creditor and you've got something that goes through a bankruptcy, I would tell you I mean, if you've got a huge legal department and it doesn't cost you anything to file unsecured crediting, you know, claims and if this is just now a staff position within the business, I mean, look, you're already that size.
Speaker 1:You already know what you're doing. If you are not that size and you are hiring outside counsel or would have to hire and pay outside counsel, the faster you can mentally walk away from the process as an unsecured creditor, the better you will be. The game and the name of the game in that scenario is not what you're going to get out or get back from the bankruptcy. It is what you are not going to spend from that point forward and literally setting more money on fire. Hiring attorneys to monitor the bankruptcy and submit an unsecured creditor form and, you know, go to creditor committee and and listen on conference calls.
Speaker 1:All you are doing at that point is you are creating a billing for you, and you're gonna be paying attorneys to do this stuff for you. And, the odds of receiving any money if you're an unsecured creditor or I mean, I don't know what the specific odd is. I will tell you it's basically 0. If it happens to you, it's a miracle. That's been my experience.
Speaker 1:Again, you can flame me in the comments and tell me I'm wrong. But, the amount of money that you will spend to participate in that process with outside counsel, you're not gonna get back, let alone the other side of it. If you are a service provider and you have a customer file for bankruptcy, you know, and you haven't been through it before, it's you're gonna have a rough few months. Like, it's just it sucks. You know, preference and and and the clawback sucks.
Speaker 1:The administrative period sucks. Waiting to find out if you're, designated a critical vendor or not sucks. Waiting to find out whether or not your contracts are being accepted or rejected sucks. What do you have to do with your underlying suppliers and and team and customers and everything else sucks. The process just sucks.
Speaker 1:And the way you make it suck less is you don't set more money on fire. You know? In those situations, you're just looking to escape and figure out how to escape as as quickly as possible. This isn't about winning. It's just about survival.
Speaker 1:And the faster you get out, the easier it is for you to, you know, move forward and and go on. So again, they are what they are. Understand the animal you're dealing with and what it actually means for you and and whether or not you can take advantage of it. And that's that's just what I would say and hopefully something in here helps you and if you're going through this on either side, you know, again, you know, I can't I can't say anything else except I feel free and I empathize. And if I can help in any way, you know, let us know.
Speaker 1:You know, we'll we'll steer you however we can. I'm Max Clark, and hope this helps.
