Reason 1: Business Bankruptcy allows the company to match debt service to available cash flow.
Prototypical Goal of Chapter 11
Matching debt service to cash flow is the prototypical goal of the Chapter 11 Business Bankruptcy. For example, a hypothetical plan proposed by the Debtor and confirmed (approved) by the Bankruptcy Court can involve innumerable options, but could easily include the following.
Example of matching debt service to cash flow
Assume that the company’s cash flow (EBITDA) was $100/month. Prebankruptcy secured debt service was $90/month, and it would take $500 to pay all trade creditors in full. A hypothetical treatment of this would be reducing secured debt service to $75/month, but the term is extend, and commence payments to trade creditors and other unsecured debt in the amount of $25/month. After two years, all debt would be current and the owners would maintain their ownership of the company. Although secured creditor consent is a bonus, it would not be required in this scenario.
This plan could be endlessly modified, and often EBITDA is not historically or immediately positive, but assuming that a negative EBITDA can be fixed, the remainder of the solution is easy. The process is significantly more complex than this overview might imply, but the underpinnings of the theory are very straightforward and can be easily determined.