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What is a pre-petition waiver and how does it work?

Bankruptcy can become a significant stigma for small businesses in Kentucky and their owners. Bankruptcy is often viewed as the "nuclear option" to be used only after other attempts at keeping a business solvent have failed. However, even businesses that are deeply in debt may be able to avoid bankruptcy by negotiating agreements to restructure their debts instead of filing a bankruptcy petition.

One of the most useful devices in a pre-bankruptcy negotiation is the pre-petition waiver. Creditors who are negotiating debt reorganization with their debtors always keep a weather eye on the possibility that the debtor will file a bankruptcy petition and invoke the automatic stay to halt collection actions. If the debtor agrees to waive the automatic stay against a particular creditor, that creditor may be convinced to give the debtor more time to pay off the indebtedness or find other sources of capital.

Pre-petition waivers are ordinarily incorporated in the work-out agreement between the debtor and its creditors. In the basic type of pre-petition waiver, the debtor agrees to waive enforcement of the automatic stay if it breaches a provision of the work-out agreement. Most courts that have considered the enforceability of pre-petition waivers have found such agreements to be enforceable, although individual courts may consider other factors, such as whether the waiver adversely affects unsecured creditors and other parties having an interest in the bankrupt estate.

Any business that is negotiating with creditors in an effort to restructure its debts may wish to consult a knowledgeable bankruptcy attorney for about the wisdom of entering into a pre-petition waiver. Likewise, a creditor who has been offered a pre-petition waiver by an insolvent debtor may wish to obtain advice about the terms of the waiver and the effect it will have on the creditor maximizing its claims against the debtor.

Source: FindLaw, "Pre-Petition Waivers of the Automatic Stay," accessed on May 14, 2017

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