Today’s healthcare industry business
model — including hospitals, nursing
homes, independent and assisted-living
facilities, and home health care — is under
siege for many reasons. It faces some very
daunting economic challenges ahead,
as well as a plethora of reimbursement
problems and reorganization issues. As a
result, many lenders have tightened their
belts, changed bond lending covenant requirements and formulas or pulled entirely
out of healthcare. Lenders have done this
because many of them have underper-forming entities in their portfolio.
Tough times to access cash
and lines of credit
Healthcare organizations are having a difficult time collecting cash and are finding it
increasingly difficult to comply with their
bond covenants. Many healthcare providers are receiving Medicare and Medicaid
reimbursements that do not cover their
costs. And at any time, federal and/or state
governments can affect those healthcare
facilities with fixed cash flows, causing
significant changes in available funding.
Lenders are finally starting to loosen
their purse strings when it comes to
healthcare companies seeking funding —
despite healthcare reform. The first priority
for hospital CEOs is to operate with lean
management staffs and reduce operating
expenses while providing quality care. But
when things just don’t work out and a borrower files for bankruptcy, lenders should
consider some important strategies for
preserving their investments.
Chapter 7 (liquidation) versus Chapter
11 (reorganization) versus Chapter 13
The filing of a bankruptcy case, under
any chapter of the Bankruptcy Code
triggers an injunction against the continuance of any action by any creditor
against the debtor or the debtor’s property. This may be a relief for the filer, but
bankruptcy is a complex process and
significant differences exist among the
types of filings.
When an organization files for bank-
ruptcy under Chapter 13 of the code, for
example, its aim is to have the opportunity
to repay some or all of the debts in its
name under better terms (i.e., lower or no
interest). Unlike Chapter 7, which involves
liquidating assets, this process involves re-
structuring debts, which allows the debtor
to use future income to pay off creditors.
(The United States Bankruptcy Code gives
the debtor five years to repay creditors.)
Filing Chapter 13 is thus applicable to
debtors with regular income that can af-
ford to request adjustments or reductions.
Although the attorney will safeguard the
organization’s interests, the bankruptcy
court supervises the entire process.
The automatic stay prohibits:
◗ Beginning or continuing lawsuits
◗ Collection calls from creditors
◗ Foreclosure sales
◗ Garnishments or levies
The automatic stay remains in effect
until a judge lifts the stay at the request
of a creditor, the debtor gets a discharge
or the estate no longer has the property.
There are both pros and cons to consider
here. For example:
◗ The court imposes strict procedural,
disclosure and notice requirements.
◗ Each business requires a separate case.
◗ Filing is very expensive (Chapter 11).
◗ Lack of control (under Chapter 7) could
leave the company with no management in place to run the facility.
Assignment for benefits of creditors
The court can assign the filer’s assets to an
“assignee” that liquidates the assets and
pays the claims. There are several pros and
cons with this as well. For example:
◗ The company selects the assignee.
◗ The process has flexibility under
◗ The assignee holds the title to the assets.
◗ The process is generally more cost-efficient than bankruptcy.
◗ No automatic stay exists.
When can a creditor get “relief”
from that stay?
As mentioned, filing bankruptcy automatically stays most actions against the
debtor or the debtor’s property, such as
foreclosures, lawsuits or garnishments.
The stay is designed to preserve the
debtor’s property and give the debtor a
break from litigation. The stay is neither
absolute nor permanent.
Creditors seeking relief from the stay
must show the bankruptcy judge, after a
hearing, that there is “cause” for granting
relief (which might include showing that
the creditor’s interest in particular property is not “adequately protected”) or that
the debtor has no equity in the property
and that the property is not necessary for a
Most often, the secured creditor wants
relief from a stay to foreclose on real estate.
Creditors can frequently get relief, if the
debtor has no equity in the property or the
property is not insured. When the equity
cushion (the difference between the creditor’s claim and the value of the property)
is small, the debtor may have to make “
adequate protection payments” to the creditor
to preserve the equity cushion for the creditor’s benefit to keep the stay in effect.