Businesses often prefer to avoid Chapter 11 and go into receivership because it carries fewer negative connotations and involves less administrative work. A regulator, private entity or court appoints a receiver to the businesses. Once the company goes into receivership, the receiver runs the business and oversees the business’s assets. Their goal is to maximize profits so the company can pay down its debt to creditors. Their job may involve turning the business around and making it once again financially viable. Conversely, it may include liquidating all or part of the assets to service those debts.
They can clean house
During the receivership, the receiver may negotiate new terms to pay off debts to creditors, hire new management, dissolve the board of directors, and take other steps to make the company more profitable and efficient. They also issue monthly reports to stakeholders like creditors, the court and the company.
While bankruptcy has strict guidelines for handling debts, receivership has more flexibility. For instance, the receiver can prioritize creditors and stockholders, thus better ensuring they get their money.
Creditors need to be proactive
Creditors dealing with a debtor in receivership often find it helpful to work with an attorney who handles business collections. These legal professionals understand the nuances of receivership and can work with the receiver and aggressively advocate for their client, making the receivership work in their favor. If need be, they can also assist the receiver in recognizing fraudulent transfers of funds before receivership and identify which assets to sell or liquidate to service debts.