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5 Common Chapter 11 Bankruptcy Mistakes to Avoid

While reorganizing a company’s debts under Chapter 11 can provide much-needed financial stability and establish a solid foundation for future growth, achieving these outcomes requires an informed approach. Company owners and executives who are contemplating a Chapter 11 filing need to be confident that they are making informed decisions, and they need to be careful to avoid mistakes that could diminish the benefits of going through the reorganization process. Learn more from an experienced Miami Chapter 11 bankruptcy lawyer:

Mistake #1: Failing to Weigh All of the Pros and Cons of Filing Under Chapter 11

One of the first mistakes company owners and executives need to avoid is going down the path of pursuing a Chapter 11 bankruptcy when it is not in their company’s best interests to do so. When contemplating reorganization under Chapter 11, owners and executives need to carefully weigh all of the pertinent pros and cons. Filing under Chapter 11 isn’t the best choice in all scenarios, and if the drawbacks outweigh the benefits, it will likely make more sense to pursue a different option for restoring the company’s financial stability.

Generally speaking, the benefits of filing under Chapter 11 include:

  • The ability to continue doing business
  • Protection under the automatic stay
  • The opportunity to reduce the company’s monthly debt load
  • The opportunity to eliminate certain debts
  • The ability to build a solid financial foundation for the company’s future

In comparison, the drawbacks include:

  • Reorganizing means committing to repaying your company’s debts over time
  • Creditors can seek relief from the automatic stay in some circumstances
  • Creditors can protect their right to full payment in some circumstances
  • Going through the Chapter 11 bankruptcy process takes time
  • Going through the Chapter 11 process can impair your company’s credit

For more information on each of these benefits and drawbacks, you can read our article: Pros and Cons of Chapter 11 Bankruptcy for Companies in Financial Distress.

Mistake #2: Failing to Consider Creditors’ Claims and Defenses

Generally, initiating a business bankruptcy under Chapter 11 affords immediate relief from collections and allows companies to develop favorable reorganization plans that allow them to continue to invest in their operations while paying down their remaining debts over time. This is especially true in “small business” bankruptcies under Subchapter V.

However, companies’ creditors will have grounds to enforce their right to full payment in some cases. If any of your company’s debts are subject to creditors’ claims or defenses during the Chapter 11 bankruptcy process, this is a factor that you need to carefully consider when deciding whether to proceed under Chapter 11. If you decide to proceed, you will need to work with your company’s Miami Chapter 11 bankruptcy lawyer to anticipate these claims and defenses—and to be prepared to respond to them as necessary.

Mistake #3: Moving Forward with Unrealistic Expectations

Another mistake we see far too often is company owners and executives deciding to pursue reorganization under Chapter 11 based on unrealistic expectations. As we just discussed, not all debts are necessarily eligible for discharge or reorganization during the Chapter 11 bankruptcy process. Additionally, while there is a lot that an experienced Miami Chapter 11 bankruptcy lawyer can do to help, owners and executives still need to be prepared to play an active role in developing their companies’ reorganization plans and deciding how to deal with individual debts.

A critical factor to keep in mind is that while reorganizing a company’s debts under Chapter 11 can provide a solid foundation on which to build, coming out of bankruptcy successfully requires an effective business plan and strong corporate management. Mismanagement of a company’s finances post-bankruptcy can quickly lead to default—undoing the benefits achieved through the bankruptcy process and potentially giving creditors grounds to ask for the company’s bankruptcy order to be set aside.

Mistake #4: Overlooking Potential Roadblocks to a Favorable Reorganization

Along with individual creditors’ claims and defenses, other potential roadblocks can get in the way of executing a favorable reorganization as well. Overlooking these potential roadblocks can be costly, and it is another mistake that company owners and executives need to avoid.

Fraudulent transfer allegations, claims asserted by the U.S. trustee and various other occurrences can add both costs and delays to the Chapter 11 bankruptcy process. They can prevent companies from achieving anticipated benefits as well—potentially meaning that pursuing reorganization under Chapter 11 was the wrong choice in the first place. In this scenario, not only can filing under Chapter 11 fail to serve its intended purpose, but it can also prevent the company from timely pursuing other (and better) alternatives.

Mistake #5: Relying on Misguided Advice or Incomplete Information (or Both)

The business bankruptcy process is complicated. Chapter 11 is incredibly complex, and making informed decisions requires a clear understanding of the relevant implications for your company. As a result, it is essential that you obtain reliable advice and make decisions based on all pertinent legal, financial and business considerations.

To ensure that you are acting in your company’s best interests, it is important to work closely with an experienced Miami Chapter 11 bankruptcy lawyer before, during, and after the process. You need a lawyer who can help you give due consideration to all of the options that are available—not just filing under Chapter 11—and who can help you move forward with confidence. At Edelboim Lieberman, we have extensive experience guiding companies through times of financial distress, and we can use this experience to help ensure that you are doing what is best for your company’s future. s

Schedule a Complimentary Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

Are you contemplating filing a business bankruptcy in Florida? If so, we strongly encourage you to contact us for more information. To speak with an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman in confidence, call 305-768-9909 or request a complimentary consultation online today.

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