Fix the Business, Not Just the Balance Sheet
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A company emerges from Chapter 11. Debt has been reduced. Contracts have been modified. A plan has been confirmed.
Eighteen months later, it files again.
The restructuring industry calls it a Chapter 22: a second Chapter 11 filing by a company whose first trip through bankruptcy failed to create a durable business.
The explanation is often straightforward.
“They fixed the balance sheet, but they didn’t actually fix the business,” Drew McManigle says in a recent episode of Reviving Giants.
Restructuring attorney John Melko takes the point one step further. In some cases, he says, the first restructuring may not have fixed the balance sheet either. It may simply have created a capital structure that worked under optimistic projections.
A Confirmed Plan Is Not Proof of a Viable Company
Modern restructurings often emphasize speed, negotiated plans, debt conversion, and rapid emergence.
Those developments can reduce cost and uncertainty. But they can also create pressure to define success as confirmation rather than long-term performance.
A plan may be legally confirmable and still rest on assumptions a business cannot meet.
Melko describes projections built around best-case outcomes and management teams that remain confident that every favorable event will occur.
“Management is always supremely confident — right until they’re not,” McManigle says.
That confidence is understandable. Executives are trying to preserve a company, retain employees, and persuade lenders that the enterprise deserves another chance.
But hope is not a forecast.
A restructuring model must account for operating realities: customer demand, pricing power, labor costs, supplier terms, required investment, market shifts, and management’s ability to execute. Debt relief cannot compensate indefinitely for a business that loses money at the operating level.
Lender Incentives Have Changed
Melko also points to a structural change in the lending market.
When banks were the dominant commercial lenders, they often maintained long-term relationships with borrowers. A troubled company might move into the bank’s workout group, but the lender’s objective was generally to recover its loan. If the business was worth more alive than dead, the bank had a reason to support a workable reorganization.
Today, more commercial credit comes from private credit funds, hedge funds, private equity funds, asset-based lenders, and other nonbank sources.
Those creditors are not inherently less rational. But their objectives may differ.
A fund may hold debt across several levels of the capital structure. It may own a competing or complementary portfolio company. It may be willing to convert debt to equity, retain a meaningful yield on the remaining debt, or integrate the distressed company’s assets elsewhere if the standalone business fails.
“There is less emphasis on reorganizing that company,” Melko says.
That distinction matters. The capital provider may achieve an acceptable investment outcome even when the original operating company does not survive in its existing form.
Too Much Debt Can Survive the Restructuring
Debt-to-equity conversions are common in Chapter 11. A lender forgives or converts part of its claim, becomes the new owner, and leaves a smaller amount of debt on the reorganized company.
The question is whether the remaining debt is truly sustainable.
Melko notes that companies are sometimes left with more leverage than their operations can support. The new owners may receive attractive interim cash returns, while the company remains vulnerable to a modest decline in performance.
If revenue misses projections, margins compress, or the market changes, the supposedly reorganized company can quickly return to distress.
The balance sheet may look improved relative to the one that entered bankruptcy. That does not mean it is right-sized for the business that emerged.
Does the Business Have a Reason to Exist?
At MACCO, McManigle says the assessment begins with a basic marketplace question:
“Is there a reason for this company even to exist?”
That question can sound severe, but it prevents stakeholders from spending millions to preserve a business model the market no longer supports.
A company may have suffered from excessive debt, poor management, or a temporary shock. Those problems may be repairable.
But the underlying issue may also be permanent.
Customer preferences may have changed. The company may have lost what made its brand distinctive. Labor and input costs may have made its pricing model unworkable. A regulatory or tax change may have undermined the economics of an entire sector.
In those cases, reducing debt does not create demand.
The better answer may be a sale, combination, managed liquidation, or transfer of assets to an operator that can use them more effectively.
Operational Credibility Must Come Before Financial Engineering
A durable restructuring requires more than a negotiated capital structure. It requires a credible operating thesis.
That means understanding why the company failed, what has changed, who will execute the plan, and whether the reorganized business can perform under realistic—not ideal—conditions.
The process should test management’s assumptions, not simply memorialize them.
Chapter 11 can provide time, leverage, and legal authority. It cannot manufacture a reason for customers to buy, employees to stay, or lenders to keep funding losses.
A company has not been fixed because it emerged.
It has been fixed when it can operate, compete, and generate sufficient cash without returning to court.
Takeaways For Leaders
● Plan confirmation is a legal milestone, not proof of business viability.
● Test projections against downside conditions, not only management’s best case.
● Understand the economic objectives of each lender and new equity owner.
● Right-size debt to realistic operating cash flow.
● Decide early whether the business should be reorganized, sold, combined, or liquidated.
Listen to the Full Episode
Reviving Giants is presented by MACCO Group and hosted by Drew McManigle. To hear the full conversation with John Melko on Chapter 22 filings, lender dynamics, and what makes a restructuring durable, listen on the Reviving Giants podcast page or wherever you get podcasts.
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TL;DR
Debt reduction alone does not create a viable company. A lasting restructuring must address the operating causes of distress, use realistic projections, and answer the fundamental question of whether the business still has a reason to exist.
