Most companies that file for Chapter 11 bankruptcy fail to emerge as an operating entity. But that statistic is misleading, says Gerry Sherman, managing partner of CCR Corporate Revitalization LLC.

The reason, he says, that most bankruptcies fail is that they are not planned well. "Most are done defensively, when creditors and banks are swooping in," says Sherman.

New U.S. bankruptcy laws that take effect this fall make surviving a Chapter 11 even more difficult making planning even more crucial, Sherman notes.

"The reform in bankruptcy law is extensive, complex and still being digested by the legal community," he says.

However, as it is being digested, the general consensus is that the new law is "creditor friendly," Sherman says. Changes, including those highlighted by the Turnaround Management Association, include:

Heightened requirements to pay utilities. Stringently required cash deposits or other payments convertible to cash (letter of credit, surety bond) are necessary.

Stronger reclamation rights. The law expands the time that vendors can reclaim goods delivered to 45 days prior to the reorganization filing. In addition, goods received by the reorganizing company within 20 days preceding the filing and sold by the company in the course of business are entitled to an administrative claim and receive a priority distribution form.

Unexpired leases of commercial properties. The new law determines that leases of commercial property not assumed by the earlier date of either when the reorganization is confirmed or 120 days after filing are deemed rejected with only one possible extension of 90 days.

Under the previous law, there was a 60-day deadline for a lessee to assume or reject unexpired leases. However, the courts routinely deferred formal assumption or rejection for much longer times.

Time to exclusively file a reorganization plan. Under the previous law, debtor companies had 120 days but could get liberal extensions, which Sherman says could go on for years. Exclusivity prevents the possibility of outsiders filing reorganization plans and gaining control. Under the new law, companies have 120 days to file a plan of reorganization or liquidation from the filing date and notes that the exclusivity period cannot be extended beyond 18 months.

Sherman explains that for a company to be able to reorganize successfully within a year is unusual. He says the average time typically is two to three years—longer than the exclusivity deadlines in the new law.

However, changes in the bankruptcy law aren't the only challenges for a company considering reorganization.

"Successful turnaround also is much more difficult because of the changing needs of companies today," he says. Twenty years ago, the economy was less demanding. Today, the desire for competitiveness and efficiency are much higher.

Filing for bankruptcy, Sherman says, does not have to be adversarial. "For viable companies, (bankruptcy) is not just planned out in advance but coordinated with outside parties," he explains.

A company must answer several questions, including:

• How can the company have the cash to run the business day-to-day?
• What opportunities are gained from the changes such as altering production lines orlocations?
• What is the end game? If reorganization is the plan, a company must have a way to get there.

"Use Chapter 11 as a tool intelligently, when it has the potential to create good results," Sherman says. e