Why Most Restructurings Start Out of Court

Introduction

Restructuring engagements rarely start with a Chapter 11 filing. The default first move, even on cases that ultimately end up in court, is an out-of-court attempt: a privately negotiated workout with the company's most consequential creditors, often centered on the holders of the impaired tranche or the soon-to-mature debt. The math is straightforward. Out-of-court paths cost a fraction of what Chapter 11 costs, run on shorter timelines, preserve customer and vendor relationships, and keep the negotiation private. The constraint is consent: out-of-court tools depend on per-instrument agreement from affected creditors, and any single holder large enough to block the deal can either force concessions or push the company into court.

This article opens the out-of-court section of the guide by explaining why workouts dominate the first phase of most engagements, what the cost and timeline differential actually looks like in numbers, how ad hoc committees and steering groups organize creditor coalitions, where the holdout and free-rider problems set the limits of what is achievable out of court, the Regulation FD constraints that govern public-company workouts, the standard banker fee structure that runs across the engagement, the dual-track architecture that anchors modern mandates, and how the choice between a workout and a filing intersects with the diagnostic work covered in the strategic decision article.

The headline reason most restructurings start out of court is professional fees. Chapter 11 cases produce fee bills that compound across multiple stakeholder groups (the debtor's counsel and financial advisor, the creditor committees' counsel and financial advisors, the DIP lender's counsel, special counsel for litigation matters, the U.S. Trustee), all paid as administrative expenses ahead of pre-petition creditor recoveries. Direct costs of Chapter 11 are typically estimated at 1-2% of total assets in the largest cases and 4-5% in smaller cases, with academic research suggesting fee intensity has materially increased since the 2010s (Chapter 11 fees in 2022 consumed roughly four times as much of debtors' pre-bankruptcy assets as in the prior decade).

The percentage figures are approximate and case-specific (highly contested cases run materially higher; small or simple cases run lower), but the relative ordering is consistent: out-of-court is dramatically cheaper than Chapter 11, prepacks sit between them, and free-fall cases are the most expensive option available. Recent fee precedents reinforce the magnitudes. PJT Partners' Marelli engagement in 2025 cleared at a $35 million fee that sparked a U.S. Trustee objection before being approved; PJT charged a $200,000 monthly advisory fee starting March 2025 with 50% credit against the restructuring fee (capped at $600,000) on one engagement; Ducera's Enviva engagement in 2024 included a $157,000 monthly retainer plus a $3.8 million success fee with a $78,750 monthly credit against the success fee after the third month. These are the structural anchors of how distressed advisory work is priced today.

Out-of-Court Restructuring (Workout)

A privately negotiated debt restructuring conducted without filing for bankruptcy protection. The toolkit includes amendments and waivers, forbearance agreements, consent solicitations, distressed exchange offers, debt-for-equity swaps, new-money rescue financings, and liability management transactions. Out-of-court restructurings preserve confidentiality, run on shorter timelines than Chapter 11, and avoid the heavy administrative-expense fee load of in-court cases, but they require the consent of affected creditors and cannot bind dissenters in the way a confirmed Chapter 11 plan can. Industry estimates put out-of-court workouts at roughly 70-75% of restructuring activity in any given period, with Chapter 11 reserved for situations that genuinely require court mechanisms.

Timing is the second consequential difference. An out-of-court workout typically completes in six to nine months from the company's initial engagement of advisors through closing of the restructuring transaction. A Chapter 11 case, by contrast, runs three to six months for a pre-arranged case, nine to eighteen months for a typical free-fall case, and two-plus years for the most contested cases (large mass-tort or fraud-driven cases routinely extend three to five years). The compounding effect of fees over a multi-year case is one of the reasons direct costs scale up so quickly when out-of-court paths fail.

The shorter out-of-court timeline also matters operationally. Distressed companies experience continuous degradation while in distress: vendor terms tighten, key employees leave, customer relationships erode, competitors capture share. Each additional month under stress damages the underlying business. A six-month workout that resolves the capital structure with minimal operational disruption preserves more enterprise value than an eighteen-month free-fall Chapter 11 that resolves the same capital structure but exits with a meaningfully smaller business.

Chapter 11 is a public process. The petition is on the docket, the disclosure statement is filed publicly, the financial projections are exhibits to court motions, the customer and vendor lists appear on the schedules of assets and liabilities, and the negotiations are conducted in front of bankruptcy court hearings that creditors, journalists, competitors, and customers can attend. Out-of-court workouts run privately. Even when a public company has to disclose a restructuring negotiation under SEC reporting rules, the disclosure typically describes the existence of negotiations rather than the underlying economics, terms, or counterparties.

The confidentiality differential matters most for businesses where customer relationships depend on the perception of stability. Consumer-facing brands, technology companies with long sales cycles, healthcare providers with referral networks, and B2B businesses where customers care about supplier viability all benefit disproportionately from keeping the restructuring out of public view. The 2024-2025 shift toward liability management transactions is partly driven by this confidentiality advantage: an LMT can resolve the same capital structure issue as a Chapter 11 filing without ever appearing in a public docket.

The company also retains operational control out of court in ways that Chapter 11 fundamentally restricts. In Chapter 11, every meaningful corporate action above the ordinary course (selling assets, taking on new debt, paying pre-petition claims, modifying contracts, terminating leases) requires court approval. Out of court, management runs the company normally during the negotiation, which keeps the operational rhythm intact and avoids the executive distraction that Chapter 11 imposes on management teams.

Out-of-court paths work when three conditions hold:

1. Concentrated capital structure. The affected creditors must be identifiable, contactable, and negotiable as a group. A company with a single sponsor, three term loan lenders, and a small bondholder coalition can negotiate consensually. A company with ten thousand retail bondholders distributed across multiple registered offerings cannot. 2. Sufficient liquidity runway. A minimum of six months of cash, ideally twelve, because out-of-court paths take time and a company that runs out of cash mid-negotiation has effectively chosen Chapter 11 by attrition. 3. Manageable non-financial liabilities. A company facing thousands of mass-tort plaintiffs, large environmental claims, or unfunded pension obligations often cannot resolve those liabilities consensually and needs the court's discharge mechanisms that Chapter 11 provides.

Out-of-court restructurings rarely happen as bilateral negotiations between the company and individual creditors. They happen through coalitions: ad hoc committees on the creditor side, often delegating day-to-day decisions to smaller steering groups. Understanding how these coalitions form is central to understanding how out-of-court engagements actually run.

Ad Hoc Committee

A self-organized group of creditors (typically bondholders, term loan lenders, or a mix) that forms voluntarily to negotiate collectively with a distressed debtor, separate from any Official Committee that the U.S. Trustee might appoint in Chapter 11. The ad hoc committee retains its own counsel and financial advisor (a creditor-side RX bank), often with fees reimbursed by the company under a fee letter executed early in the engagement. The committee structure is not prescribed by any rule; it is a creature of market practice, with flexibility on membership, governance, and decision-making. Most large workouts are negotiated through ad hoc committees rather than through individual creditor outreach, because the company needs a single negotiating counterparty that can deliver consent across the largest portion of the impaired class.

The standard formation sequence runs as follows. The borrower's RX bank identifies the largest 5-10 holders in each impaired class (typically representing 50-70% of the class). Counsel for those holders, often a single firm specializing in ad hoc creditor representation (Akin Gump, Davis Polk, Paul Weiss, Stroock, Milbank, Kirkland's distressed practice), reaches out to the borrower or the borrower's counsel, signs the fee letter that obligates the borrower to reimburse the committee's professional fees, and starts the formal negotiation. The committee then delegates day-to-day decision-making to a steering group (often three to five of the largest holders), which attends weekly calls with the company, negotiates term sheets, and signs off on non-material decisions. Settlement and resolution decisions go back to the full committee.

The fee reimbursement structure matters because it shapes the committee's incentives. A committee whose professionals are paid by the borrower is less aligned with hostile tactics that might delay resolution; a committee paying its own freight is freer to litigate. The 2024-2025 era saw most large-cap out-of-court engagements run through fee-reimbursed ad hoc committees, with the borrower agreeing to pay reasonable professional fees in exchange for the committee engaging substantively rather than holding out.

Out-of-court restructurings face a structural challenge that Chapter 11 solves: dissenting creditors cannot be bound to terms they have not consented to. Two related dynamics create most of the friction.

Holdout

A creditor who refuses to participate in an out-of-court restructuring in order to extract better treatment than the participating creditors. Holdouts can be strategic (a hedge fund accumulating a position in a class because it expects holdout leverage) or accidental (a small institutional holder with internal policy that prevents participation in restructurings). The holdout problem is the central limitation of out-of-court workouts: any holder large enough to block the required consent threshold can extract concessions that the other creditors must absorb, or push the company into Chapter 11 where the absolute priority rule and cramdown mechanics can override the holdout's position.

Holdouts are creditors who refuse to consent to the restructuring in the hope of being paid in full while other creditors take haircuts. If enough of the class participates that the deal can close, the holdouts effectively get their original contractual rights while their consenting peers absorb the impairment. Holdout leverage is one of the central reasons large-cap restructurings increasingly use exit consents (where the participating bondholders amend the existing bonds to strip covenants and protections, making the holdout position economically unattractive) and toggle structures (where the deal converts to a prepackaged Chapter 11 if consent thresholds are missed, using the cramdown rules to bind dissenters).

Free riders are a related problem. A creditor who declines to participate in the restructuring but benefits from the financial recovery of the company is free-riding on the consenting creditors' concessions. The two dynamics are not mutually exclusive: a holdout that ultimately fails to block the deal becomes a free rider when the restructuring closes and the company recovers.

The 2020-2025 era saw a structural expansion of what "out-of-court" means in practice. Traditional out-of-court tools (amendments, waivers, forbearance, exchange offers, debt-for-equity swaps) had been part of the toolkit for decades. Liability management transactions (uptier exchanges, drop-down financings, double-dips) added a new category in which a majority creditor coalition could effectively impose terms on non-participating creditors through credit-agreement mechanics rather than consent. The volume of LMT activity climbed steadily through the cycle, with 2024 representing a high-water mark for transaction count and CreditSights tracking the activity through quarterly updates.

The implication is that out-of-court is not a fixed concept. It encompasses both consensual workouts (where all affected creditors agree) and quasi-coercive LMTs (where a majority coalition uses basket capacity to alter the priority structure without consent from non-participating creditors). The LMT section of this guide covers the LMT toolkit in detail; the rest of this section covers the traditional consensual workout tools.

For a restructuring banker on a typical out-of-court mandate, the workstreams run in parallel rather than sequence. The bank takes the engagement, builds the 13-week cash flow and capital structure review, and then begins three simultaneous tracks.

The dual-track approach (out-of-court primary, prepack contingency) is the modern default on most major mandates. Building both tracks adds incremental cost in the early phase but avoids the much larger cost of having to start the prepack from scratch if the consent path fails late. The 2024-2025 cycle saw the transition from out-of-court to prepack become smoother as RSAs, exchange offers, and prepack solicitation processes converged on similar mechanics: the same anchor holders, the same economic terms, the same exchange ratios can route through either path.

A subtle but consequential point: even on engagements that ultimately end in Chapter 11, the out-of-court phase often produces meaningful value. The pre-filing negotiation, even when it does not close as a workout, narrows the issues, identifies the consenting creditors who will become the RSA group, drafts the term sheet that becomes the plan economics, and resolves the most contentious points before the case enters court. A Chapter 11 case that begins after six months of out-of-court negotiation typically runs faster, costs less, and produces less inter-creditor litigation than a free-fall case that begins cold. The shorter in-court timeline (a prepack at 30-60 days versus a free-fall at 12-18 months) more than offsets the cost of the pre-filing work that did not produce a consummated workout.

The implication for sequencing is that almost every engagement should start out of court even when the banker suspects from Day 1 that the case will end in Chapter 11. The out-of-court phase produces the negotiated framework that makes the eventual filing manageable, and the cost of that work is dramatically lower than the cost of skipping it. The only situations that justify going directly to a free-fall filing are genuine emergencies (eight weeks of cash or less, a vendor cascade in progress, a controlling creditor who has filed an involuntary petition or is about to) where there is simply no time for the pre-filing negotiation.

The default is out-of-court because the math favors it. The exception is Chapter 11 when out-of-court genuinely cannot work, either because the capital structure is too dispersed, the liquidity is too short, the non-financial liabilities are too consequential, or the holdout dynamics make consent unattainable. The rest of this section walks through the specific tools that make up the out-of-court toolkit, starting with the lightest (amendments and waivers) and progressing through the heavier interventions (exchange offers, debt-for-equity swaps, rescue financings) that resolve the more impaired credits.