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10 Common Misconceptions about Filing for Business Bankruptcy Under Chapter 11

There are lots of misconceptions about bankruptcy. While some people assume that businesses that file are on the brink of failure, others assume that filing for bankruptcy is simply a way for large companies to get away with not paying their debts. But, the reality is that, for most businesses, filing for bankruptcy is far more mundane.

This is especially true when filing under Chapter 11.

A Chapter 11 bankruptcy is what is known as a “reorganization” bankruptcy. In contrast to “liquidation” bankruptcies in which debtors give up many of their assets in exchange for discharging many of their debts, reorganization bankruptcies are designed to help keep struggling businesses afloat. By reorganizing (or restructuring) their debts, businesses can manage their cash flow more effectively, and they can continue paying off their debts while still continuing to invest in their long-term growth and success.

The Truth About Filing for Business Bankruptcy Under Chapter 11

What do business owners need to know in order to make informed decisions about filing for bankruptcy? Here is the truth behind 10 common misconceptions about filing under Chapter 11:  

1. Filing for Bankruptcy Does Not Mean Going Out of Business

Businesses that file for bankruptcy under Chapter 11 do not have to go out of business. While liquidating under Chapter 7 typically means that business owners will need to close up shop and try again, reorganizing under Chapter 11 provides the financial stability companies need to keep pushing forward. In fact, not only is it possible to stay in business when filing under Chapter 11 but it is assumed that the business will keep operating.

2. Filing Under Chapter 11 Does Not (Necessarily) Mean Making Major Changes

Many people confuse the concept of reorganization under Chapter 11 with the concept of reorganizing a business’s ownership or organizational structure. In comparison to reorganizing a business, reorganizing a business’s debts is a fairly straightforward process. It generally doesn’t involve making major changes, and, in most cases, it won’t interfere with the business’s day-to-day operations.

With that said, businesses can use Chapter 11 filings to make major changes if they wish to do so. For example, businesses can use Chapter 11 filings as a way to unload unwanted assets when their alternatives are limited.

3. Chapter 11 Bankruptcy Doesn’t Have To Be a Long and Drawn-Out Process

While Chapter 11 bankruptcies can take a long time, this doesn’t have to be the case. One way that many businesses can efficiently file for bankruptcy is by filing what is known as a “prepackaged” bankruptcy or “prepack.” Essentially, this involves negotiating with creditors before filing with the court and then submitting a mutually-agreed reorganization plan for the court’s approval. This not only avoids many of the delays involved in a typical bankruptcy proceeding, but it can help businesses avoid many of the risks as well.

4. Chapter 11 Bankruptcies Do Not Leave Businesses Without Lenders and Suppliers

Another common misconception is that when a business files for Chapter 11 bankruptcy, it will lose its relationships with lenders and suppliers. But, in most circumstances, this isn’t the case. Filing under Chapter 11 not only gives lenders and suppliers reassurance that they will get paid over time for amounts already owed, but it also helps free up capital for businesses to cover new costs and expenses going forward.

5. Chapter 11 Bankruptcies Do Not Drive Clients and Customers Away

Likewise, filing for bankruptcy under Chapter 11 generally doesn’t drive the business’s clients or customers away. Most clients and customers won’t know about the bankruptcy filing. Even if the filing gets publicized, any negative stigma will likely be short-lived, and, as the business continues to operate, its clients and customers will continue coming back for more.

6. Filing Under Chapter 11 Does Not Mean Handing Your Business Over to the Bankruptcy Trustee

While it is true that the bankruptcy trustee “plays a major role in monitoring the progress of a chapter 11 case and supervising its administration,” it is not true that the trustee will take over running your company. Generally speaking, the trustee’s role is to monitor—not to insert himself or herself into your company’s management and operations.

7. Filing Under Chapter 11 Does Not Mean Constantly Seeking Court Approval for Business Decisions

In a similar vein, while some transactions will be subject to court approval during the Chapter 11 bankruptcy process, company owners remain free to operate in the ordinary course of business. While Chapter 11 filers need to be careful to seek court approval when necessary, they can (and should) work with their counsel to put relevant short-term policies and protocols in place. Just as business owners don’t want to be hamstrung by the need to seek court authorization, bankruptcy judges don’t want to be overburdened with unnecessary requests for approval.

8. It Isn’t Always Necessary to Deal with a Creditors’ Committee

While large companies may need to go through the process of dealing with a creditors’ committee (if they don’t pursue a prepack), this isn’t a requirement for many small businesses. In small business bankruptcies (filed under subchapter V of Chapter 11), debtors can obtain confirmation of their reorganization plans without the formation of a creditors’ committee.

9. Owners Can Get Paid After Filing for Chapter 11

After filing for bankruptcy under Chapter 11, business owners cannot set money aside to pay themselves special distributions when the money should go to their creditors. However, owners can continue to pay themselves appropriate salaries or draws.

10. Filing for Chapter 11 Bankruptcy Is Not Cost-Prohibitive

Finally, while many people seem to think that filing for bankruptcy is prohibitively expensive, this is not the case. When filing for bankruptcy under Chapter 11 makes sense, the financial benefits of filing will outweigh (and usually far outweigh) the costs involved.

Speak with a Business Bankruptcy Lawyer in Miami

If you would like to know more about how businesses can leverage the Chapter 11 bankruptcy process to their advantage, we invite you to get in touch. To schedule a free initial consultation at Edelboim Lieberman Revah, please call 305-768-9909 or get in touch online today.

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