Introduction
Many businesses rely on equipment financing to operate.
Examples include:
- medical equipment
- restaurant equipment
- construction machinery
- laundromat systems
- manufacturing equipment
While financing allows businesses to expand, these loans can become a major burden during financial distress.
Bankruptcy law provides several tools to deal with equipment debt.
Equipment Loans vs Equipment Leases
Equipment financing typically appears in two forms.
Equipment Loans
The borrower owns the equipment but the lender holds a security interest.
Equipment Leases
The lender retains ownership while the business pays to use the equipment.
Both structures create obligations that may need restructuring in bankruptcy.
Chapter 7 Treatment of Equipment
In Chapter 7 liquidation:
- secured lenders may repossess equipment
- the trustee may sell the equipment
- proceeds go toward the secured loan
If the equipment value is less than the debt, the remaining balance becomes an unsecured claim.
Chapter 11 Equipment Restructuring
Chapter 11 allows businesses to restructure equipment obligations.
Options include:
- renegotiating payment terms
- surrendering equipment
- restructuring loan balances
One powerful tool is the cramdown, which allows the debt to be reduced to the equipment’s market value.
Example Scenario: Laundromat Equipment Loan
A laundromat business faced financial distress due to a $1 million equipment loan with $13,000 monthly payments.
Chapter 11 restructuring was considered to reduce the loan balance to the actual value of the equipment.
This type of restructuring can dramatically reduce debt burdens.
Rejecting Equipment Leases
In Chapter 11, businesses may reject equipment leases that are no longer necessary.
Once rejected:
- the lease terminates
- equipment is returned
- the creditor receives a claim for damages
This allows businesses to eliminate expensive or unnecessary obligations.
Conclusion
Equipment financing is essential for many businesses but can become overwhelming during financial distress.
Bankruptcy law provides several strategies to address these debts, including surrender, restructuring, or rejection.
With proper planning, businesses may reduce equipment obligations and restore financial stability.