What Is Out-of-Court Restructuring? (And Why It Works)

Corporate America's approach to financial distress fundamentally shifted in 2024. For the first time, out-of-court restructurings accounted for 70% of all corporate workouts, marking a decisive break from the traditional bankruptcy-first mindset. 

According to JP Morgan's analysis, out-of-court transactions exceeded formal Chapter 11 filings by more than 2-to-1, and "it wasn't even close."

Moody's reported that distressed exchanges represented 64% of all defaults in the first half of 2025, the highest share on record since the 1980s. 

This wasn't an anomaly. 

S&P Global tracked 85% of 2023 defaults stemming from out-of-court restructurings, up from just 30% in 2020.

With $84 billion in defaults recorded in 2024 and $94 billion in speculative-grade debt maturing in 2025, this shift has profound implications for lenders, investors, and management teams navigating distressed situations. Understanding why out-of-court restructuring has become the dominant strategy requires examining both the mechanics and the measurable advantages.

Out-of-Court Restructuring Explained

Out-of-court restructuring is the consensual modification of a company's debt obligations through direct negotiations with creditors, without filing for bankruptcy protection. 

These transactions, also known as workouts, consensual restructurings, or distressed exchanges, allow companies to address financial distress while maintaining operational control and avoiding the Chapter 11 statutory framework.

The process typically involves negotiating amendments to existing credit agreements, extending maturity dates, adjusting interest rates, or converting debt to equity. More sophisticated structures include liability management transactions (LMTs) such as uptier exchanges, drop-down transactions, and priming arrangements that reallocate collateral or payment priority among creditor groups.

Unlike Chapter 11 bankruptcy, out-of-court restructurings occur in private negotiations. There's no automatic stay, no bankruptcy court supervision, no creditors' committee appointed by the U.S. Trustee, and no public disclosure requirements beyond what existing loan documentation or securities laws mandate.

The critical distinction lies in creditor consent. 

While Chapter 11 allows a debtor to "cram down" a reorganization plan on dissenting creditors through judicial approval, out-of-court restructurings generally require agreement from creditors holding sufficient voting rights under the relevant credit documents. 

Modern LMTs have become increasingly sophisticated in structuring transactions that can proceed with controlling lender consent rather than unanimity, though the specific threshold depends on the original credit agreement terms.

According to CFGI, the typical out-of-court restructuring takes 6 to 9 months to complete, compared to 9 to 12 months for Chapter 11 cases. This timeline advantage is just the beginning of why these transactions have gained market dominance.

Why Out-of-Court Restructuring Works

The most compelling argument for out-of-court restructuring appears in the recovery data. 

S&P Global's LossStats database, analyzing transactions from 1987 through 2023, found that out-of-court distressed exchanges yield an average recovery rate of 79% compared to just 48% for bankruptcies lasting one to three years.

The correlation between time and value destruction is direct. Bankruptcies resolved in under six months averaged 60% recovery rates; those under one year, 56%; and those extending beyond a year, 48%. Out-of-court transactions consistently outperformed across all timeframes.

According to Fitch Ratings and S&P Global, distressed exchanges delivered recovery rates 48.2% higher for high-yield bonds and 18.3% higher for leveraged loans than traditional bankruptcy defaults. Average recoveries ranged from 78.5% to 92.6% in distressed debt exchanges, versus 39.5% in bankruptcy proceedings.

For senior lenders, the advantage is particularly pronounced. Post-restructuring credits with tighter covenants, cleaner capital stacks, and greater recovery visibility achieved recovery rates 15-20% higher than those of traditional high-yield debt, according to Covenant Review data analyzed by Ainvest.

These recovery differentials translate directly to economic outcomes for all stakeholders. A lender facing a $100 million exposure would expect to recover $79 million through an out-of-court exchange versus $48 million through a prolonged bankruptcy. That $31 million difference represents real value preservation.

Cost Efficiency

Chapter 11 bankruptcy is expensive. Bloomberg Law reports that direct administrative costs typically consume 2% to 5% of a debtor's assets in bankruptcy, with significant variation by company size. 

The Fordham Journal documented this inverse relationship: the smallest quartile of companies (averaging $7.1 million in assets) spent 10.1% on bankruptcy costs, while the largest quartile (averaging $2.4 billion) spent 2.1%.

In 2024, courts approved $2.1 billion in Chapter 11 fees across all cases, according to Octus Americas Restructuring Advisor Rankings. Major restructuring partners at firms like Kirkland & Ellis now bill up to $2,465 per hour, with counsel rates reaching $2,245 per hour. The Fordham study calculated average daily costs of $33,709 in Chapter 11, with a median of $11,795.

These direct costs don't capture the full economic impact. 

Bloomberg Law estimates indirect costs from lost sales, damaged reputation, and management distraction at 10% to 15% of firm value, bringing total default costs to 10% to 45% of debtor value, depending on industry, asset marketability, and leverage.

Out-of-court restructuring avoids most of these expenses. There are no court filing fees, no U.S. Trustee quarterly fees, no court-appointed creditors' committee fees, and significantly reduced professional fees due to faster timelines and private negotiations.

While specific cost data for out-of-court restructurings remains unavailable mainly due to the private nature of these transactions, the structural cost advantages are substantial. Every percentage point of estate value preserved in reduced professional fees flows directly to creditor recoveries or equity value preservation.

Speed and Business Continuity

Time matters in distressed situations. The CFGI analysis confirms that out-of-court restructurings take 6 to 9 months, compared to 9 to 12 months for traditional Chapter 11 cases. Even the fastest Chapter 11 variants take longer: prepackaged bankruptcies take a median of two months, prearranged cases take four months, and conventional Chapter 11s take eleven months, according to Fitch Ratings' 2003-2016 study.

The Fordham research found an average Chapter 11 duration of 410 days (1.13 years), with complex cases extending 24 to 48 months. Extreme outliers like Energy Future Holdings and ASARCO LLC took 48 and 52 months, respectively.

Speed translates to value preservation. 

S&P Global's LossStats database shows that recovery rates decline over time in restructuring. Shorter restructuring timelines mean less accumulated interest, lower professional fees, reduced operational disruption, and maintained stakeholder confidence.

The operational continuity advantage is equally significant. Companies executing out-of-court restructurings typically maintain normal business operations throughout the process. There's no bankruptcy filing announcement to concern customers, no public disclosure of financial weaknesses to embolden competitors, and no "debtor-in-possession" stigma affecting supplier relationships.

The 2024 data showed that 70% of restructurings occurred out-of-court precisely because companies and their lenders recognized that preserving operational momentum often matters more than accessing bankruptcy's statutory tools.

Confidentiality and Reputation Protection

Chapter 11 is a public process. Court filings become part of the public record, financial details are disclosed in schedules and statements, and creditor disputes play out in open court proceedings. Media coverage of bankruptcy filings can trigger customer defections, supplier payment demands, and employee departures.

Out-of-court restructurings occur in private. PwC's Restructuring 2025 Outlook noted that "the level of real estate restructuring activity relative to other sectors is likely higher than what is reflected in the Chapter 11 filings," precisely because larger distressed real estate assets were "more successful at arranging out-of-court workouts" that remained confidential.

For consumer-facing brands, regulated financial institutions, or companies with concentrated customer relationships, reputation preservation can be the determining factor. Private negotiations allow management to control the narrative with key stakeholders rather than responding to bankruptcy court publicity.

CFGI emphasizes that out-of-court restructuring is completed "without the risks of important financial documents becoming available to the public," resulting in "less business disruption" due to public knowledge of financial disputes. Companies can maintain supplier credit terms, preserve customer confidence, and retain key employees without the stigma that empirical data shows can deter customers and suppliers from doing business with bankrupt entities.

Flexibility and Structural Innovation

Chapter 11 operates within the constraints of the Bankruptcy Code. Plan structures must satisfy statutory requirements, court approval is necessary for significant decisions, and creditors can form official committees with independent advisors at estate expense.

Out-of-court restructurings allow parties to design bespoke solutions. The explosion of liability management transactions in 2024, with volume reaching $50 billion according to Covenant Review and Alternative Credit Investor, demonstrates this flexibility advantage. These sophisticated structures, including drop-down transactions, double-dip arrangements, and amend-and-extend deals, would be difficult or impossible to execute within bankruptcy's statutory framework.

Parties can negotiate terms that make economic sense for their specific situation, without regard to bankruptcy court precedent or statutory fairness requirements. Settlement agreements can include customized governance provisions, unique collateral arrangements, or innovative equity structures that address the particular concerns of the creditor group.

This flexibility also extends to timing. Parties control the negotiation schedule and can accelerate or decelerate discussions based on business needs rather than court calendars and statutory deadlines.

When Out-of-Court Restructuring Works Best

Not every distressed situation favors out-of-court resolution. 

Success depends on several structural factors that determine feasibility and likely outcomes.

Capital Structure and Creditor Dynamics

Out-of-court restructuring works best with simpler capital structures. CFGI notes that while unanimous creditor approval isn't always required, "if the company has a complicated capital structure, an out-of-court restructuring becomes less viable. As more creditors are involved in the situation, consensus becomes harder to achieve."

Companies with single-lender financing or small lending syndicates can negotiate efficiently. Those with multiple creditor classes, intercreditor disputes, widely-held bond issues, or significant trade debt face structural challenges to achieving consensus.

The composition of the lender group matters significantly. The growth of private credit to $1.5 trillion in 2024, projected to reach $2.3 trillion by 2027 according to Cleary Gottlieb, has facilitated out-of-court restructurings. Private credit lenders holding concentrated positions can negotiate and execute restructurings more efficiently than widely dispersed bondholders or loan syndicate participants.

Direct lending now represents 44% of assets under management in private credit. These concentrated lender relationships enable the sophisticated liability management transactions that have become prevalent in 2024-2025.

Company Size and Operational Viability

The 2024 bankruptcy filing data revealed a pattern. Deloitte's US Restructuring Outlook noted that larger companies with at least $2 million in assets or liabilities saw only a 3% to 5% increase in Chapter 11 filings, compared with the overall 20% increase across all business sizes. This suggests that larger companies are more successful at utilizing out-of-court alternatives.

Middle-market firms face unique challenges. CFO.com and Oberon Securities observed that companies with $10 million to $1 billion in annual revenues are "far more likely to experience financial and operational distress" than larger firms, with "creditor recoveries typically lower" and "risk of outright liquidation significantly higher." These companies often lack the treasury functions and sophisticated advisors that facilitate complex out-of-court negotiations.

Operational viability remains essential. Out-of-court restructuring addresses balance sheet problems, but it requires a business that creditors believe can succeed with modified debt terms. Companies facing fundamental business model failure need a more comprehensive operational restructuring that Chapter 11 can facilitate.

Industry-Specific Patterns

Different industries exhibit distinct restructuring patterns driven by asset characteristics, regulatory considerations, and lender relationships.

Software and technology companies accounted for 19% of 2024's liability management transactions, according to S&P LCD and PitchBook analysis. These companies' intellectual property and subscription revenue models translate well to out-of-court workouts.

Healthcare companies overwhelmingly prefer out-of-court restructurings due to concentrated lender bases. ION Analytics and Debtwire reported that while healthcare had 39 Chapter 11 filings in 2024, the majority of healthcare restructurings occurred out of court. Private debt from a few lenders makes consensus achievable, and avoiding public bankruptcy protects patient confidence and regulatory standing.

Real estate shows a bifurcated pattern. PwC found that 187 real estate Chapter 11 filings in 2024 represented 35% of total filings, but noted that larger distressed real estate assets successfully arranged out-of-court workouts while smaller operators used Chapter 11. The difference often relates to whether a lease rejection is needed versus pure debt restructuring.

Retail also presents unique challenges. With 7,327 store closures in 2024 (a 57.8% increase from 2023, according to ICSC and CRE Daily), retailers often need Chapter 11's lease rejection powers to rationalize store footprints, even if debt restructuring could occur out of court.

When Out-of-Court Restructuring Doesn't Work

The enthusiasm for out-of-court restructuring must be tempered with a realistic assessment of its limitations and failure rates.

Repeat Defaults

S&P Global's research found that 37% of out-of-court restructured entities either restructure again or file for bankruptcy. This substantial failure rate indicates that many out-of-court transactions provide only temporary liquidity relief, without addressing underlying operational problems.

AlixPartners' 2025 Turnaround and Transformation Survey found that 93% of restructuring executives agree that liability management exercises and "amend and extend" approaches are temporary stopgap measures that don't ultimately fix operational problems. The survey suggests that distressed companies extending their liquidity runway through these transactions will likely face distress again within three years.

PwC reported that more than 60 companies filed for bankruptcy for a second or even third time over 2022-2024, with many repeat filers in the retail sector, including Party City, Joann's, rue21, and Eastern Mountain Sports.

These statistics underscore a crucial distinction: out-of-court restructuring effectively addresses liquidity and balance-sheet stress, but it cannot fix fundamental business-model problems, operational inefficiencies, or secular industry decline. 

Companies need operational transformation, not just financial engineering.

When Chapter 11 Provides Strategic Advantages

Certain situations require Chapter 11's statutory framework. The automatic stay immediately halts all collection actions, providing breathing room that consensual forbearance agreements may not achieve with every creditor. The cramdown mechanism allows a company to impose a reorganization plan on dissenting creditor classes, solving the holdout problem that can derail out-of-court negotiations.

Companies needing to reject executory contracts benefit from bankruptcy's statutory framework. Retailers closing stores need a lease rejection under Section 365. Companies with burdensome union contracts may need to modify collective bargaining agreements under Section 1113. These tools don't exist outside bankruptcy.

Section 363 sales enable companies to sell assets free and clear of liens and successor liability, often at higher values than distressed out-of-court sales. Companies facing fraudulent conveyance claims, preference actions, or other complex liability disputes benefit from the comprehensive resolution that Chapter 11 provides.

Fragmented creditor bases with diverse economic interests often make consensus impossible. When creditors include banks, bondholders, equipment lessors, trade creditors, tort claimants, and pension funds with conflicting priorities, Chapter 11's voting and cramdown mechanisms may be the only path to comprehensive resolution.

The 2025 Landscape of Out-of-Court Restructuring

Market indicators suggest out-of-court restructuring will remain the dominant approach through 2025 and beyond.

AlixPartners' 2025 survey found that 70% of global restructuring executives forecast the number of out-of-court restructurings will increase over the next twelve months. CSC's Restructuring Study reported that 83% of restructuring professionals expect the volume of restructuring mandates to grow significantly or modestly over the next two years, with 25% predicting significant increases.

Several structural factors drive this outlook:

• The maturity wall remains substantial: Moody's Analytics identified $94 billion of speculative-grade debt maturing in 2025, with 27% rated Caa and lower. High interest rates continue to put pressure on debt service for leveraged companies. The Federal Reserve's prolonged period of higher rates has prolonged refinancing challenges that began in 2022.

• Private credit's continued expansion provides flexible capital sources willing to execute out-of-court transactions. Industry projections suggest the private credit market will grow from $1.5 trillion in 2024 to $2.8 trillion by 2028. These sophisticated lenders increasingly view out-of-court restructuring and debt-to-equity conversions as standard tools rather than last resorts.

• The market has also developed institutional knowledge and standardized approaches. Major restructuring advisory firms, law firms, and lenders have refined playbooks for various transaction types. The $50 billion in liability management transactions in 2024 represents not just volume but also the maturation of techniques and market acceptance.

AlixPartners' survey identified that nearly 70% of respondents cite sufficient liquidity and capital as the primary challenge for companies facing turnaround or transition, followed by debt management and cost reductions. Additionally, 96% believe strained trade relations, global conflicts, and regulatory changes will directly lead to corporate distress over the next 12 to 24 months.

This combination of near-term maturity pressures, flexible capital availability, and geopolitical uncertainty suggests the 2024 trend toward out-of-court restructuring will accelerate rather than reverse.

Making the Strategic Choice

Out-of-court restructuring has evolved from an alternative strategy to a dominant approach, accounting for 70% of corporate workouts in 2024. 

The data demonstrates measurable advantages: 79% average creditor recovery versus 48% for prolonged bankruptcies, six to nine month timelines versus nine to twelve months for Chapter 11, and substantial cost savings from avoiding court supervision and public disclosure.

These advantages explain why distressed exchanges accounted for 64% of defaults in early 2025, why the ratio of exchanges to bankruptcies exceeded 4-to-1 in 2024, and why sophisticated lenders and investors increasingly structure transactions to facilitate out-of-court resolution.

The approach has limitations. A 37% repeat default rate shows that financial engineering alone cannot solve operational problems. Companies that need comprehensive restructuring, face holdout creditors, or require statutory tools such as lease rejection may benefit from Chapter 11's framework. The choice isn't binary between good and bad options but rather a strategic assessment of which approach best serves stakeholder interests given specific circumstances.

The evaluation requires analyzing capital structure complexity, creditor relationships, operational viability, industry dynamics, and whether the company's challenges are primarily financial or operational. Lenders must assess whether consensual restructuring protects their recovery better than bankruptcy's certainty and statutory protections. Management teams must weigh operational continuity against comprehensive solution requirements.

Sources

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