As a kid growing up in the 1980s, I was exposed to legendary, cutting-edge artificial intelligence, such as KITT from Knight Rider, C-3PO and R2-D2 from Star Wars, Vicki from Small Wonder, and, of course, the unforgettable Lisa from Weird Science. These days, however, I must admit to being somewhat resistant to the use of AI in the legal context. The fact of the matter is, I like doing the research and reading cases. I even print them out. I think it’s helpful to summarize transcripts myself.  Sure, I have trouble reading my own handwriting sometimes. Much of what I read does not relate to the issue at hand. However, I believe that doing that work helps me learn the law, the issues, the witness, or the judge better than if someone or something did it for me. I believe it stimulates creativity. I realize I may sound like a grumpy old lawyer.

Because of these feelings, I have not used many of the AI applications developed for the legal industry, which are used by many of my colleagues. I do enjoy using ChatGPT, however, for help on random questions at home. My wife and I have received excellent itinerary suggestions and travel ideas for trips with our kids. Since I have some familiarity with ChatGPT, I thought it would be interesting to consider some of its responses to common bankruptcy questions. Would ChatGPT answer it like me?  Below is a summary of its answers in response to the following question: What are the five most common business bankruptcy questions you receive? Please tailor to corporate clients and provide your answer.

1. What are the key differences between Chapter 7, Chapter 11, and Subchapter V (small business Chapter 11)?

ChatGPT provided one or two-sentence summaries of Chapter 7 (Liquidation), Chapter 11 (Reorganization), and Subchapter V (of Chapter 11), which are similar to how any number of bankruptcy lawyers would respond. For Chapter 7, it pointed out that a trustee is appointed to liquidate assets, and directors and officers immediately lose control. For Chapter 11, it notes that the company remains as a debtor-in-possession, which is the most common route for large debtors. For Subchapter 5, it correctly describes it as a streamlined process for small business debtors that offers reduced costs. ChatGPT, however, misstated the statutory debt limit as approximately $7.5 million.

2. Can we maintain control of the company during the bankruptcy process?

ChatGPT generally answered that management remains in place as the debtor-in-possession, while noting that the bankruptcy court can appoint a trustee or examiner. ChatGPT also referenced that companies often negotiate DIP financing to sustain their operations. I believe ChapGPT’s answer is a good, standard response. I think many lawyers, however, would have spent another sentence on the possibility of a trustee appointment, while also mentioning the significant role and authority granted to the Official Committee of Unsecured Creditors.    

3. What happens to our contracts, leases, and vendor relationships?

ChatGPT responds that “bankruptcy allows companies to ‘assume’ (keep) or ‘reject’ (terminate) executory contracts and unexpired leases.” ChatGPT also notes this process is often a central strategy point and that certain contracts (like IP contracts or union agreements) may have special protections or requirements.

I agree with ChatGPT that assumption and rejection issues are often critical to debtors-in-possession. I think it is unfair to judge ChatGPT (or humans) on short responses to a question, as it brings us into the nuanced world of Bankruptcy Code § 365. However, I must point out that “rejection” does not necessarily mean “termination.”   

4. How does bankruptcy affect corporate creditworthiness, reputation, and financing options?

ChatGPT responds that the filing will appear on public records and impact credit for up to 10 years, while noting the potential for exit financing and mitigating reputation risk through effective communication. I like ChatGPT’s answer. I tend to discuss credit impact more with individual debtors, but like ChatGPT, we often focus on effective communications and public relations for corporate debtors.

5. What alternatives exist to formal bankruptcy proceedings?

ChatGPT provides a brief description of out-of-court workouts, pre-packaged chapter 11, assignments for the benefit of creditors, and receiverships or bridge entities. In practice, my experience is that parties spend significant time focused on out-of-court workouts and bankruptcy alternatives.  

Conclusion

I enjoyed the process of learning the most common business bankruptcy questions to ChatGPT and its near immediate responses, which I understand is its prediction, based on a tremendous amount of data, of how a human would answer. Bankruptcy lawyers would be able to respond to these straightforward questions almost as fast as ChatGPT. In real life, I believe most effective lawyers would focus on getting to the ultimate question: what is your exit strategy? How can we get you to where you need to be? Despite the emergence of artificial lawyers, I think and hope we will continue to have the privilege of answering that ultimate question, while helping clients deal with the significant financial and emotional costs.   

Nelson Mullins attorneys are experienced in handling bankruptcy matters of all sizes and are well-equipped to advise debtors, trustees, purchasers, and other stakeholders on both the legal and practical aspects of issues affecting non-profit companies in bankruptcy cases.