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Sorvino Discusses the Importance of Chapter 11 for Distressed Businesses

April 2, 2009

Business bankruptcies soared 63 percent in 2008 from the year before, as the global recession, consumer spending slump and near freeze in the market for business loans hit companies hard. The number is expected to climb again this year, according to Macquarie Capital research. Despite a weak economy, companies often avoid filing for bankruptcy protection, even when stalling can delay a turnaround or result in a total collapse.

Executives, especially those who started a business, believe they know a company better than any outside adviser possibly could. They resist admitting that they weren't as nimble as they should have been when business first began slowing, and they fear the stigma of failure attached to bankruptcy will follow them throughout their careers. Bankruptcy is also expensive since companies have to pay for their own legal counsel, management consulting help, attorneys for the credit committee and other advisers.

Restructuring pros cite the example of electronics retailer Circuit City, which had to liquidate after late attempts to fix its finances and find a buyer failed. Calling in restructuring advisers or filing for bankruptcy earlier could have allowed the company to streamline its business or address expensive real estate agreements, said Heidi Sorvino.

"Now look at what they've done -- they've liquidated all those people out of work, all those stores closed, all those leases rejected," Sorvino said. Sorvino draws on skills developed from her Master's degree in clinical social work when she works with clients. "Admitting failure is really tough," she said. "A lot of them are in disbelief. (They say) 'How could this happen?'"

But if executives go into bankruptcy court with a good reorganization plan, companies can have a better chance of surviving a turbulent economy. "You can't wait to file," Sorvino continued, adding that an early bankruptcy filing can preserve cash and prevent judgments from creditors.

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