Skipping Court: The Rise of Out-of-Court Restructuring

By: Karina Kohli, Class of 2028

Introduction: Businesses are Continuing to Face Financial Distress

Preheat your oven to 350 degrees, and in a bowl, mix together frustrated debtors, not-so-trusting creditors, publicized negotiations, expensive regulatory procedures, and a distressed reputation. If you do it right, you will have one perfectly golden Chapter 11 filing, an In-Court Restructuring procedure.

Over the last four years, there has been a consistent increase in Chapter 7, 11, and 13 business bankruptcy filings for both public and private companies.[1] The upwards slope began in 2022 with 13,481 total commercial filings, and the most recent data for 2025 points to 24,737 total commercial filings.[2] Factors that have contributed to filings nearly doubling in the past four years include economic pressures, such as inflation and interest rates, trade disruptions, consumer demand, and high operating costs and expenses.[3]  In the last year, firms like Spirit Airlines, Eddie Bauer, and Saks Global are just a few of the well-known consumer brands that have faced financial distress and are seeking judicial oversight for restructuring strategies.[4]

However, the metrics above are actually larger, though we do not know how much larger, due to an increased popularity in another restructuring method, known as out-of-court restructuring.

Out-of-Court Restructuring: What Is It and Why Do It?

An out-of-court restructuring is a transaction similar to a bankruptcy, but without oversight of its capital structure by a court.[5] It is essentially another way businesses are attempting to mitigate their financial distress, only without court involvement.

More companies are participating in these out-of-court strategies because they avoid costly fees, are time-efficient, involve fewer stakeholders, which ensures more certainty, and are privatized.[6] 

Cost-and Time-Efficient: a successful out-of-court restructuring involves less time and money than preparing a Chapter 11 filing, attending court hearings, communicating with creditors, and generating financial statements.[7] Typically, even the most basic Chapter 11 procedures can cost a business between $30,000-$50,000.[8]

Minimal Stakeholder Involvement: Unlike in bankruptcy proceedings, where there is an unsecured creditors’ committee, a judge, or a U.S. Trustee in the middle of negotiations, there are fewer parties in an out-of-court process, which leads to a more streamlined, certain, and controlled outcome.[9]

Privatized Process: out-of-court restructurings are not obligated to be publicized through filings and press-releases.[10] Thus, making them less burdensome, more stakeholder-forward, and less of a reputational loss on the firm.

Out-of-Court Restructuring: How Do I Begin?

A driving indicator of whether a business can engage in the out-of-court process is its liquidity. While the process is more cost-efficient than an in-court procedure, businesses must have sufficient cash resources to determine whether they can remain afloat for the duration of forming their out-of-court resolution.[11] Another driving indicator in beginning the process is having a simple capital structure.[12] That is, having limited creditors because the process requires unanimous approval by all creditors (i.e., individuals, banks, vendors, suppliers, etc.), and if there are a multitude of creditors, it will be more difficult for a firm to get the plan’s requisite unanimous approval.[13]

The out-of-court process is essentially an agreement between the debtor and its creditors.[14] It can be initiated by either party when it is clear that the debtor is in financial distress.[15] From here, out-of-court restructuring strategies are presented to creditors without the time spent in bankruptcy litigation.[16] Upon agreement of the plan, the creditors will organize into committees, delegating speakers for further negotiations, which naturally occurs throughout the process.[17]

Out-of-court negotiations include compromises between the business and its creditors, which ultimately help reduce immediate financial obligations. Whether it be through lowering interest rates and/or refinancing, trading in old debt for new debt, or a request to postpone payment dates, among other contractual terms.[18] Depending on several factors, such as cash-flow and company size, will determine how long the process should take, though it is a more informal, flexible plan.

Out-of-Court Restructuring: The Disadvantages

Sure, out-of-court restructuring seems like a no-brainer. Here, firms have a more certain, streamlined, timely, and cost-effective way to strategize their financial stability, yet many still have yet to engage. The risk of failure stems from various factors, such as a complex capital structure, the initial reason to restructure, and the need for judicial resources.[19]

Complex Capital Structure: for larger firms, where financial debt is held by various creditors, some of which may be unorganized, a conspicuous, fully negotiated, and unanimous agreement may not be feasible without the help of judicial oversight.[20] In addition, stakeholders, known as the “dissenting minority,” can easily discourage transactions with their right to deny if the terms are unfavorable.[21] Thus, requiring agreements to be negotiated again and reducing the out-of-court initial value in time and cost.

The Firm’s Initial Reason to Restructure: a firm may choose to undergo a restructuring process for a multitude of reasons, some of which are not best suit for out-of-court methods. These reasons include: if a firm’s creditors are forcing it into bankruptcy; if necessary changes are more complex than simple balance-sheet alterations; if a company is facing severe insolvency to a point where it must undergo broader operational restructuring or asset sales.[22]

Reliance on Judicial Resources: because there is no judicial oversight in out-of-court procedures, companies are foregoing the legal protections that come with filing bankruptcy. These protections include the automatic stay, which prohibits all substantial claims and acts creditors may raise against the firm, immediately upon the bankruptcy filing; the debtor’s prohibition of paying out claims that arise before the filing, saving cash assets; the ability to develop a restructuring plan that is not dependent on a unanimous agreements, with the power of rejecting unfavorable burdensome contracts creditors may attempt to impose.[23]

Conclusion: A Firm’s Overall Objective

Out-of-court restructuring continues to pioneer its way into many commercial reorganization strategies. The process itself boils down to an informal way firms can discreetly rearrange relationships with creditors and internally reorganize their own operations, aiming to avoid judicial advisory.

However, the main problem is clear: we do not know exactly how many firms have already unsuccessfully attempted this method, which resulted in a subsequent filing for bankruptcy protection anyway. Even if there is a fraction of those 24,737 filings, last year, that commercial leadership attempted to resolve out of court first, advantages like saving time and money are completely offset by the subsequent in-court filing. This “do over” then exacerbates the issues “baked” into the perfectly golden Chapter 11 filing.

Ultimately, while skipping court may seem tempting for a firm that is already facing financial distress and creditor frustration, this restructuring trend should be approached apprehensively. There is no “one-size-fits-all” process, thus, requiring many forms of trial and error which leads to inefficiency. This is especially true if the firm’s overall objective is to create a viable restructuring and turnaround plan without dipping into Chapter 7 liquidation filings.

Sometimes, upfront costs and “excessive” advisory can lead to operational efficiency in the long run, and it will be interesting to see what firms decide to prioritize in the future, as bankruptcy risks continue to rise.

[1] PwC, Restructuring 2026 Outlook (Feb. 4, 2026), https://www.pwc.com/us/en/services/consulting/deals/library/bankruptcy-outlook.html. 

[2] Admin. Off. of the U.S. Cts., December 2025 Quarterly Bankruptcy Filings (Dec. 31, 2025), https://www.uscourts.gov/data-news/reports/statistical-reports/bankruptcy-filing-statistics/december-2025-quarterly-bankruptcy-filings.

[3] PwC, supra note 1; Cornerstone Rsch., Mega Bankruptcies Surge in First Half of 2025 with Inflation, Interest Rates, and Public Policy Uncertainty Cited as Key Drivers (Sept. 24, 2025), https://www.cornerstone.com/insights/press-releases/mega-bankruptcies-surge-in-first-half-of-2025/.

[4] Saks Glob., Saks Global Secures $1.75 Billion of Committed Capital and Announces Return of Industry Veterans to Advance Transformation of Iconic Luxury Portfolio, PR Newswire (Jan. 14, 2026), https://www.prnewswire.com/news-releases/saks-global-secures-1-75-billion-of-committed-capital-and-announces-return-of-industry-veterans-to-advance-transformation-of-iconic-luxury-portfolio-302660717.html; Spirit Airlines, Inc., Spirit Airlines Takes Action to Build a Stronger Foundation and Future for America's Leading Value Airline (Aug. 29, 2025), https://ir.spirit.com/news/news-details/2025/Spirit-Airlines-Takes-Action-to-Build-a-Stronger-Foundation-and-Future-for-Americas-Leading-Value-Airline/default.aspx; Eddie Bauer LLC, Eddie Bauer LLC, Operator of US and Canadian Stores, Initiates Voluntary Chapter 11 Process With Support of Lenders, Bus. Wire, Inc. (Feb. 9, 2026), https://www.businesswire.com/news/home/20260208409879/en/Eddie-Bauer-LLC-Operator-of-US-and-Canadian-Stores-Initiates-Voluntary-Chapter-11-Process-With-Support-of-Lenders.

[5] My Chi To, Expert Q&A on Out-of-Court Restructurings, Debevoise & Plimpton LLP 18 (July/Aug. 2017), https://www.debevoise.com/-/media/files/pdf/my-chi-to--pdf.pdf.

[6] Id. at 19.

[7] Id.

[8] Jeffrey B. Peltz P.C., Chapter 11 Bankruptcy Explained https://www.aaalawyer.com/en/area-of-law/bankruptcy/chapter-11-bankruptcy/ (last visited Mar. 4, 2026).

[9] To, supra note 5.

[10] Out-of-Court Restructuring: Step-by-Step Guide to Understanding Out-of-Court Restructuring, Wall Street Prep, Inc. (Sept. 16, 2022), https://www.wallstreetprep.com/knowledge/out-of-court-vs-in-court-chapter-11-restructuring/.

[11] CFGI, Out-of-Court Restructuring or Bankruptcy?: Pros and Cons (Feb. 24, 2022), https://www.cfgi.com/resources/articles/out-of-court-restructuring-or-bankruptcy-pros-and-cons/.

[12] Id.

[13] Id. 

[14] Jirapong Sriwat & Pruk Chaweekulrath, Out-of-Court Debt Restructuring as an Alternative to Business Reorganisation Proceedings (2022), https://www.nishimura.com/en/knowledge/publications/20211025-32681.

[15] Id. 

[16] Id. 

[17] Id. 

[18] Id. 

[19] Mark S. Chehi et al., Chapter One: An Out-of-Court Restructuring or a Chapter 11 Case: When and How to Choose, ABA 1-6, https://www.americanbar.org/content/dam/aba-cms-dotorg/products/inv/book/278736997/Chapter%201.pdf.

[20] Id.

[21] Id. at 1-7

[22] Id.

[23] To, supra note 5.