When businesses face financial distress, they often need to explore restructuring options that can help them navigate difficult times and return to profitability. Two common routes for restructuring are an Article 9 sale and a Chapter 11 bankruptcy filing. Both processes serve as tools to alleviate a business’s debt burden, but they differ significantly in terms of approach, timelines and outcomes. Understanding the intricacies of each option, including their pros and cons, is essential for businesses trying to decide which is the most appropriate route for their circumstances and goals.

What is an Article 9 Sale?

An Article 9 sale refers to the sale of assets under Article 9 of the Uniform Commercial Code (UCC). This sale typically occurs when a borrower defaults on a secured loan and the lender seizes and sells the borrower’s collateral to recover the debt. The UCC governs secured transactions across the United States, and Article 9 specifically deals with the rights of secured creditors when a borrower defaults.

Process of an Article 9 Sale

1. Default on Loan: When a business defaults on its loan or fails to meet its payment obligations, the secured creditor has the right to take possession of the collateral outlined in the security agreement.
2. Notification: Before proceeding with the sale of assets, the creditor must notify the debtor of its intent to sell the collateral. This notification must also be provided to any other secured creditors or parties who have an interest in the collateral.
3. Commercially Reasonable Sale: The creditor is required to sell the collateral in a “commercially reasonable” manner, ensuring that the sale is fair and follows standard industry practices. This can occur through public or private sales.
4. Application of Proceeds: Once the sale is completed, the proceeds are used to satisfy the outstanding debt. If the proceeds exceed the amount of debt, any surplus is returned to the debtor. However, if the proceeds are insufficient, the creditor may pursue a deficiency judgment against the debtor for the remaining amount.

Advantages of an Article 9 Sale

• Quicker Process: One of the key advantages of an Article 9 sale is that it tends to be much quicker than Chapter 11 bankruptcy. Businesses and creditors can reach a resolution more rapidly, allowing for a swift transfer of assets and less prolonged uncertainty.
• Less Expensive: Compared to Chapter 11 bankruptcy, the legal and administrative costs of an Article 9 sale are generally lower. The process is less complex, and businesses may avoid significant attorney fees and court expenses.
• Less Public Stigma: An Article 9 sale is less publicized than bankruptcy, reducing the potential for reputational damage to the business. While bankruptcy filings are public and often associated with business failure, an Article 9 sale can be more discreet.
• Flexibility in Sale Structure: The sale process can be customized to the needs of the creditor and debtor. For instance, sales can be conducted through private negotiations or public auctions, allowing for flexibility in achieving the best possible outcome.

Disadvantages of an Article 9 Sale

• Limited Relief: Unlike Chapter 11, an Article 9 sale does not provide broad relief from other liabilities. While the secured creditor can sell the collateral to recover the debt, the business may still be left with other debts and obligations that remain unresolved.
• Loss of Business Control: When the secured creditor initiates an Article 9 sale, the debtor loses control over the assets being sold. This often results in a significant reduction in the business’s ability to continue operations, as key assets may be sold to satisfy debt obligations.
• Deficiency Judgment Risk: If the sale of collateral does not cover the full amount of the debt, the debtor remains responsible for the shortfall. This can leave the business with lingering financial challenges after the sale.
• Potentially Lower Asset Value: In an Article 9 sale, assets may be sold at a distressed price, meaning the business may not receive the full market value of its assets. This could leave both the debtor and creditor at a disadvantage.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy, also known as “reorganization bankruptcy,” provides businesses with an opportunity to restructure their debts and continue operations. Unlike Chapter 7 bankruptcy, which involves liquidation, Chapter 11 allows a company to reorganize its finances while keeping the business afloat. 

Process of Chapter 11 Bankruptcy

1. Filing a Petition: A business facing financial difficulty files a petition for Chapter 11 bankruptcy in federal bankruptcy court. This petition can be filed voluntarily by the business or involuntarily by its creditors.
2. Automatic Stay: Upon filing, an automatic stay goes into effect. This legal action halts any collection activities by creditors, providing the business with breathing room to develop a reorganization plan without the immediate threat of lawsuits or asset seizures.
3. Developing a Plan of Reorganization: The business works to create a plan that outlines how it will address its debts and obligations. This plan often includes renegotiation of debt terms, downsizing, asset sales, and other strategies to improve financial stability.
4. Creditor Approval: The reorganization plan must be approved by a majority of the creditors, who may have different priorities depending on whether they are secured or unsecured. The court must also confirm that the plan meets legal requirements.
5. Plan Execution: Once the plan is approved, the business implements the restructuring, which may involve reducing its debt, selling non-essential assets, or altering its operations. The goal is to return the company to profitability over time. Sallyport has supported many businesses through the Chapter 11 process and seen them thrive following a successful reorganization.

As part of the Chapter 11 process, many businesses turn to Debtor-in-Possession (DIP) financing to provide ongoing working capital while they continue operations and put a plan in place to get back to long-term financial health. This type of financing is typically available from non-traditional lenders such as Sallyport and can expedite the Chapter 11 process amongst other benefits. 

Advantages of Chapter 11 Bankruptcy

• Comprehensive Debt Relief: Chapter 11 allows businesses to restructure all of their debts, including both secured and unsecured obligations. This provides a more holistic approach to debt relief compared to an Article 9 sale, which focuses primarily on secured debt.
• Business Continuity: Unlike an Article 9 sale, Chapter 11 allows the business to continue operations while it reorganizes. This can be crucial for businesses that have long-term value and believe they can return to profitability with the right plan in place.
• Automatic Stay: The automatic stay is a powerful tool in Chapter 11 bankruptcy, as it prevents creditors from taking legal action or attempting to seize assets while the business reorganizes. This gives the company time to develop and implement a strategy without external pressure.
• Potential for Fresh Start: Chapter 11 provides the opportunity for businesses to emerge from bankruptcy with a reorganized balance sheet, lower debt levels, and improved cash flow. This “fresh start” can position the company for future success.

Disadvantages of Chapter 11 Bankruptcy

• Lengthy Process: Chapter 11 is a time-consuming process that can take months or even years to complete. The need to develop a reorganization plan, negotiate with creditors, and obtain court approval can result in significant delays.
• High Costs: Chapter 11 bankruptcy is an expensive process due to legal fees, court costs, and administrative expenses. These costs can place additional strain on an already struggling business.
• Loss of Control: While businesses can continue to operate under Chapter 11, they are subject to oversight by the bankruptcy court and may need to obtain court approval for major business decisions. This can limit the company’s flexibility in making quick decisions and changes.
• Uncertainty: There is no guarantee that a Chapter 11 reorganization plan will be approved or successful. Creditors may reject the plan, or the business may fail to return to profitability, potentially leading to liquidation or further financial difficulties.

Choosing Between Article 9 Sale and Chapter 11 Bankruptcy

The decision between an Article 9 sale and Chapter 11 bankruptcy depends on the specific circumstances of the business. For companies with limited assets and few complex debt obligations, an Article 9 sale may offer a quicker and less expensive solution. However, for larger businesses with multiple creditors and a more intricate financial structure, Chapter 11 provides comprehensive debt relief and a chance to continue operations while restructuring.

Both options have inherent risks and benefits, and the appropriate choice depends on the company’s goals, financial situation, and the nature of its debt. The level of control the business wishes to retain and the time frame for resolution are also critical factors in the decision-making process.

How Alternative Finance Companies Can Help

While both Article 9 sales and Chapter 11 bankruptcy offer paths to restructuring, businesses facing financial distress may also benefit from working with an alternative finance company like Sallyport Commercial Finance. Sallyport specializes in providing tailored financial solutions to businesses in need of liquidity and cash flow to weather periods of difficulty.

One of the primary services Sallyport offers is asset-based lending, which can be a critical source of financing for companies restructuring under either Article 9 or Chapter 11. By leveraging a business’s accounts receivable, inventory, or other assets, Sallyport can provide the immediate funds necessary to maintain operations, pay down debts, or invest in restructuring efforts. This form of financing offers more flexibility and speed than traditional bank loans, which may be difficult to secure for distressed businesses.

Additionally, Sallyport has experience working with companies during challenging financial times, providing guidance and expertise throughout the restructuring process. Whether a business is going through an Article 9 sale or Chapter 11 bankruptcy, Sallyport can help identify the right financial tools and strategies to support the company’s recovery.

With a focus on client-specific needs and a deep understanding of the unique challenges businesses face during financial distress, Sallyport offers a lifeline that can help companies regain stability and profitability. By partnering with an experienced finance company, businesses can find a way to overcome their challenges and emerge stronger from the restructuring process.

Restructuring your Way to Success

Both Article 9 sales and Chapter 11 bankruptcy provide essential avenues for businesses to restructure and alleviate financial distress. While each option has its advantages and drawbacks, the right choice depends on the specific circumstances of the company. By working with alternative finance companies like Sallyport Commercial Finance, businesses can access the funding and expertise necessary to navigate these complex processes and return to profitability. Reach out today to speak with one of our experienced business funding consultants.