Unfortunately, over the past few years, we have all seen nursing homes struggle to make ends meet, especially during and post-pandemic. As a result, we have been involved in counseling our clients on best options to keep the facility going, or contemplating bankruptcy in these difficult times.
Here is our list of top items/issues to contemplate before deciding on whether to pursue bankruptcy or when we are engaged in bankruptcy proceedings for our clients:
- More communication with lenders/creditors is better
Often, our clients think that when faced with financial distress, less communication with the outside world is better. In our experience, that can often lead to misunderstandings and unnecessary disagreements once a bankruptcy case is filed. Early and frequent consultation with lenders, landlords and other parties with whom the nursing home will continue to do business will lead to compromise and resolution, usually before a disagreement turns into costly litigation.
- Have a coordinated plan
Many of our nursing home clients seek to deal with problems as they come when facing financial distress. This is a bad idea. If the financial future looks gloomy, consult with professional turnaround advisors as soon as possible. The few dollars you spend on developing a thoughtful strategy for economic recovery will pale in comparison to the time and money you will spend in dealing with disgruntled creditors, employees, vendors, lenders and regulators in an endless game of whack-a-mole.
- Problems with management companies or lessees
Oftentimes, owners of facilities will see financial distress occurring due to the poor performance of the operator or manager of the facility. If the problem is acute or the operator/lessee is recalcitrant, the owner/landlord should consider placing the facility into receivership, with an eye toward selling the facility or finding a new manager/operator/lessee. That can take some time, so receivership may be a way to stabilize the facility while looking for the right candidate to operate the facility in the future.
- Take a realistic view of your finances
In consulting with professional turnaround advisors to develop a recovery plan, err on the side of conservatism. Plans never turn out exactly as you would like. Overestimating expenses and underestimating revenue can only help you as you move through the execution phase of your strategy. Outperformance of budgetary projections will also make your next round of negotiations with your lenders and creditors go that much better.
- Understand the limitations of bankruptcy – part 1
Bankruptcy is a very specialized legal field, and only a bankruptcy lawyer can tell you whether the Bankruptcy Code can help you achieve a particular goal.
For example, if all of your projections show that your revenue stream will inexorably decline over time due to factors beyond your control (i.e., permanent closure of a nearby hospital that routinely referred 75% of your residents), a bankruptcy filing will not help you. Bankruptcy does not create money.
- Understand the limitations of bankruptcy – part 2
Bankruptcy is of limited use if you are in trouble with your secured lender. The Bankruptcy Code contains several important protections for creditors with collateral. You will not be allowed to use their collateral, including cash, unless you can show that the lender’s ultimate recovery will not be less than it would have been on the first day of the case.
In other words, you can’t use the lender’s cash collateral if you’re going to lose money — unless the lender consents. This is another reason to talk with your lender as soon and as often as possible. It may agree to your use of cash collateral during bankruptcy, even if it loses money, if your plan provides for the highest and fastest recovery.
- Understand the benefits of bankruptcy
The Bankruptcy Code does offer some significant benefits to a debtor, and you should understand all of those tools before deciding to file a bankruptcy petition.
For example, a debtor in bankruptcy can terminate an overpriced contract for goods or services no matter what the contract says. Any damages that the contract partner suffers as a result of the early termination become just another unsecured claim in the case, paid with whatever cents on the dollar go to that class. Meanwhile, the debtor can enter into a better-priced contract so that its future expenses are lowered.
- Negotiate first
Often, the threat of bankruptcy and the use of its restructuring tools is enough to bring a difficult lender or contract partner to the bargaining table. Threatening to reject an overpriced contract in bankruptcy may be enough to convince a vendor to lower its price.
- Understand the costs of bankruptcy
Bankruptcy is an incredibly expensive process. The debtor has to pay for its attorneys, which is bad enough, but it also has to pay for the attorneys (and probably the professional financial advisor) of the official committee of unsecured creditors. These costs will add up very quickly and cannot be avoided.
- The bankruptcy code is an economic statute
The Bankruptcy Code was designed to offer a debtor a fresh start while preserving procedural and some substantive protections for creditors. It encourages negotiation and compromise at every point in the case. But all of its provisions are focused on money and economic interests.
There is no value ascribed to non-economic interests in the Bankruptcy Code, such as the preservation of a religious or philosophical objective. A debtor entering a bankruptcy proceeding may be forced to proceed down a path that offers the highest economic recovery for creditors, even if it means that it has to give up its mission.
Neville M. Bilimoria is a partner in the Chicago Office of the Health Law Practice Group and member of the Post-Acute Care And Senior Services Subgroup at Duane Morris LLP
The opinions expressed in McKnight’s Long-Term Care News guest submissions are the author’s and are not necessarily those of McKnight’s Long-Term Care News or its editors.
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