7 Critical (and All-Too-Common) Mistakes in Small Business Bankruptcy Cases

Filing for bankruptcy under Chapter 11 can help a small business restore its financial stability. But, this assumes that the business’s owners navigate the bankruptcy process correctly. Mistakes can prove costly, and while a Miami bankruptcy litigation attorney can help business owners avoid many of these mistakes, business owners must do their part to ensure that they are making informed decisions every step of the way.

So, what do small business owners need to avoid doing when contemplating a Chapter 11 bankruptcy? Here are seven critical (and all-too-common) mistakes to avoid:

Mistake #1: Filing for Bankruptcy When It Isn’t Necessary (or Beneficial)

The first mistake small business owners need to avoid is filing for bankruptcy when it isn’t necessary (or beneficial) to do so. While a Chapter 11 filing can afford several benefits to struggling businesses under the right circumstances, there are always drawbacks to filing for bankruptcy. So, if filing for bankruptcy isn’t necessary to resolve a small business’s financial issues, the business’s owners should pursue a different route instead.

For example, in some cases, small businesses will be able to restabilize their finances through equity infusions (whether from their existing owners or from new investors). Creditors will often be willing to restructure struggling businesses’ debts as well—as doing so is often less costly (and less risky) than going through a customer or client bankruptcy. In addition to helping you file under Chapter 11, if it makes sense to do so, an experienced Miami bankruptcy litigation attorney can also help you explore the other options you have available.  

Mistake #2: Choosing the Wrong Type of Chapter 11 Filing

If a Chapter 11 filing makes sense, the next mistake small business owners need to avoid is choosing the wrong type of Chapter 11 filing. Small businesses have three main options under Chapter 11, each of which comes with its own unique set of benefits and limitations:

• A “standard” reorganization bankruptcy under Chapter 11;
• A “small business case” bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA); or,
• A “small business” bankruptcy under Subchapter 5.

Filing under Subchapter 5 has become a popular choice in recent years—and it will be the best choice for many small businesses. However, it is important not to make any assumptions when seeking to reorganize your business’s debts, as doing so can lead to unnecessary challenges, delays, and costs.

Mistake #3: Waiting to File Under Chapter 11

When filing under Chapter 11 makes sense, it generally makes sense to file right away. Rarely is there a benefit to waiting to file for bankruptcy when a business is struggling financially. While small business owners certainly shouldn’t jump the gun—and they shouldn’t file for bankruptcy when they have better options available—once the decision has been made it is typically time to move forward.

In fact, not only are there no benefits to waiting once the decision has been made, but waiting can lead to unnecessary challenges as well. While some people find the bankruptcy process intimidating (or may find it difficult to accept that they need to file), it is important to remember that the U.S. Bankruptcy Code exists for a reason. When business owners take risks and end up getting in over their heads, Chapter 11 is there to help them move on.

Mistake #4: Conducting Transactions Outside of the Normal Course of Business

Small business owners who are considering a Chapter 11 filing should generally avoid conducting transactions outside of the normal course of business. While there are exceptions, executing significant financial transactions in anticipation of a bankruptcy filing can also create challenges, and through preference actions, creditors may be able to have these transactions unwound in some cases.

With this in mind, if you are contemplating paying off a creditor, selling business assets or pursuing any other significant transactions, you should consult with a Miami bankruptcy litigation attorney before doing so. Even if your intent is to do the right thing and protect your business, these types of transactions could potentially do more harm than good.

Mistake #5: Overlooking Debts When Filing Under Chapter 11

Once you decide to move forward, you will need to work closely with your attorney to prepare your small business’s Chapter 11 bankruptcy petition. While there are several important aspects to this process, one of the most important aspects is ensuring that you list all of your company’s debts. If you omit any debts from your business’s Chapter 11 filing, these debts won’t be included in its reorganization plan—which means that your business will still be liable to pay these debts in full as they come due.

Mistake #6: Overlooking Opportunities and Making Other Uninformed Decisions

Filing for bankruptcy is not a singular event. In other words, your work isn’t done once you submit your petition to the U.S. Bankruptcy Court. Throughout the bankruptcy process, you will have several opportunities to protect your business’s long-term financial interests, and it will be critical that you work closely with your Miami bankruptcy litigation attorney to make informed decisions.

Mistake #7: Not Playing an Active Role in the Chapter 11 Bankruptcy Process

Finally, while small business owners can (and should) rely on their attorneys to guide them through the process, they also need to play an active role in the process. As a small business owner, you will need to manage your company’s finances appropriately while also working with your attorney to ensure that the bankruptcy process is as smooth and beneficial as possible. The more effort you put in, the more you will get out, and the better situated your business will be to achieve long-term success.

Schedule an Appointment with a Miami Bankruptcy Litigation Attorney

If you have questions about pursuing a small business bankruptcy under Chapter 11 (including under Subchapter 5), we invite you to get in touch. To schedule an appointment with a Miami bankruptcy litigation attorney at Edelboim Liberman, please call 305-768-9909 or contact us online today.