7 Pitfalls to Avoid Before, During and After a Chapter 11 Reorganization

Going through a Chapter 11 reorganization requires careful planning and a detailed understanding of the immediate and long-term financial implications involved. If business owners are not adequately prepared, they will risk making uninformed decisions—and this can lead to consequences ranging from an untenable reorganization plan to a denial of the business’ bankruptcy petition. Learn how business owners can ensure they are making informed decisions from an experienced Miami bankruptcy litigation attorney at Edelboim Lieberman:

Avoiding Pitfalls When Navigating a Chapter 11 Business Bankruptcy

A key to making informed decisions in a Chapter 11 reorganization is knowing which pitfalls to avoid. There are a lot of potential pitfalls of which business owners need to be aware. By understanding these pitfalls and by taking proactive steps to avoid them, business owners can help ensure that their business’s reorganization will serve its intended purpose long-term.

With this in mind, here are seven pitfalls to avoid before, during, and after the Chapter 11 reorganization process:

1. Rushing Into a Chapter 11 Bankruptcy

One of the first pitfalls business owners need to avoid is rushing into a Chapter 11 bankruptcy. While it is important not to delay when filing under Chapter 11 is warranted (more on this below), business owners need to ensure that this is the best option under the circumstances.

Depending on the circumstances, a variety of alternatives may be available. These include working with the business’s creditors to informally restructure the business’ debts or seek forbearance agreements, among others. If one of these alternatives makes sense, not only could it be cheaper and quicker than going through the Chapter 11 reorganization process, but it could have fewer long-term consequences for the business’s credit and financial risk as well.

2. Waiting Too Long to File Under Chapter 11

While it is important for business owners not to rush into a Chapter 11 bankruptcy, it is equally important for business owners not to wait too long to file under Chapter 11. When pursuing a formal reorganization is warranted, unnecessary delays can lead to unnecessary consequences.

For businesses that are facing the imminent risk of default (or that are already in default and facing the imminent risk of collection or repossession), filing under Chapter 11 affords the protection of the automatic stay. The automatic stay prohibits creditors from pursuing collection efforts, with only limited exceptions. When warranted, filing under Chapter 11 has other immediate benefits as well, and the sooner a business starts the process, the sooner it can finalize the process and move on.

3. Failing to Make All Requisite Filings and Disclosures

Once the decision is made to file for reorganization, the focus should be on ensuring that the business meets all substantive and procedural requirements for obtaining relief under Chapter 11. This includes making all requisite filings and disclosures. Businesses must include multiple pleadings and forms with their Chapter 11 bankruptcy petitions and adequately disclose their assets, liabilities, and creditors.

Failing to make all requisite filings and disclosures can lead to unnecessary delays, costs, and challenges, and, in some cases, jeopardize the business’ Chapter 11 filing. As a result, an informed approach is key, and this is one of several reasons why it is important to work closely with an experienced Miami bankruptcy litigation attorney from the outset of the process.

4. Failing to Anticipate Issues During the Process

Failing to anticipate issues during the process can lead to unnecessary delays, costs, and challenges as well. Creditors can potentially challenge businesses’ Chapter 11 filings on various grounds, and when a creditor files a challenge, responding effectively is critical for keeping the process on track.

Some examples of potential issues include reclassification claims, preferential transfer claims, post-petition transfer claims, and objections to dischargeability. But there are many others. By engaging experienced bankruptcy counsel, business owners can assess the likelihood of these issues arising and plan accordingly.

5. Mismanaging the Business’ Cash Flow and Assets During the Process

As businesses navigate the Chapter 11 reorganization process, they must ensure they continue to manage their cash flow and assets appropriately. Allegations of mismanagement, waste, fraudulent transfers, and similar issues can lead to scrutiny, sanctions, and other consequences. Creditors and the bankruptcy trustee can both raise concerns, and here too, mistakes can lead to costs and risks that could—and should—have been avoided.

6. Failing to Give Due Consideration to the Business’s Reorganization Plan

The reorganization plan is at the core of the Chapter 11 bankruptcy process—and business owners need to treat it accordingly. When filing under Chapter 11, businesses can submit proposed reorganization plans at the outset of the process, and submitting a proposed plan that is favorable but fair can help set the stage for an efficient and successful bankruptcy proceeding.

Conversely, submitting a proposed plan that is unreasonably unfavorable to creditors or that does not set the business up for effectively managing its cash flow post-bankruptcy can thwart the reorganization process. Here too, working closely with an experienced Miami bankruptcy litigation attorney is essential for making informed decisions.

7. Not Prioritizing Compliance with the Plan Post-Bankruptcy

Finally, after the reorganization process is over, business owners need to prioritize compliance with their reorganization plan. Missing payments under the business’s reorganization plan can trigger creditor claims and effectively put the business back in the same financial position that it was in pre-bankruptcy. As a result, it remains important for businesses to continue prioritizing their financial obligations and financial stability post-bankruptcy; and, if a business is unable to meet its payment obligations, its owners should engage counsel promptly to discuss the options that are available.

Schedule a Free Initial Consultation with a Miami Bankruptcy Litigation Attorney at Edelboim Lieberman

If you would like to know more about how businesses in Florida can use the Chapter 11 bankruptcy process to mitigate their financial risk and restore their financial stability, we invite you to get in touch. To schedule a free initial consultation with a Miami bankruptcy litigation attorney at Edelboim Lieberman, please call 305-768-9909 or contact us online today.