Considering Chapter 11: Key Post-Filing Mistakes to Avoid

Reorganizing a company’s debts under Chapter 11 requires an informed and strategic approach. This applies at all stages of the process. If business owners and executives aren’t careful, they can make mistakes that can have serious financial consequences—including mistakes that can threaten their company’s ability to successfully pursue reorganization in some cases. Learn more from an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman.

What Not to Do Once Your Company Has Filed for Bankruptcy Under Chapter 11

In a previous article, we discussed five common mistakes to avoid before initiating the Chapter 11 bankruptcy process. Here, we are looking at post-filing mistakes. Once a company has filed for reorganization under Chapter 11, it is imperative to avoid mistakes, including (but not limited to):

1. Failing to Maintain Normal Business Operations

As a general rule, companies that are pursuing reorganization under Chapter 11 should maintain their normal business operations during the bankruptcy process. If a company needs help managing its cash flow or any other aspect of its operations, it should seek appropriate help to ensure that its financial position does not become materially worse while its Chapter 11 case is pending.

One of the key benefits of the Chapter 11 process is that filing a bankruptcy petition triggers an automatic stay on creditors’ collection efforts. As a result, companies pursuing reorganization should be able to manage their normal business operations without the risk of facing repossession or foreclosure. With that said, an informed and cautious approach is required, as insolvent companies must demonstrate their ability to operate profitably to assuage their creditors’ concerns.

2. Failing to Seek Debtor-in-Possession Financing if Necessary

For companies that need additional financial resources in order to maintain their normal business operations during the Chapter 11 reorganization process, securing debtor-in-possession financing can provide a path forward. As we have discussed previously, debtor-in-possession financing serves as a bridge between the beginning and the end of the bankruptcy process. When needed, securing debtor-in-possession financing promptly can be one of the keys to efficiently pursuing a successful Chapter 11 reorganization.

3. Incurring Other Debts

While securing debtor-in-possession financing can be a key aspect of a successful Chapter 11 reorganization, incurring other debts can have the opposite effect. With this in mind, before incurring any other debts during the reorganization process, business owners and executives should consult with their company’s bankruptcy counsel to discuss the options they have available.

Not only can incurring additional debt during the Chapter 11 reorganization process negatively impact a company’s ability to satisfy its proposed reorganization plan (and otherwise manage its operations on an ongoing basis), but it can also give rise to creditor claims during the bankruptcy process. This can lead to additional costs and complications that can (and generally should) be avoided with an informed and strategic approach.

4. Executing Improper Post-Petition Transfers

Companies pursuing reorganization under Chapter 11 should also be careful to avoid improper post-petition transfers. Similar to pre-petition fraudulent and preferential transfers, improper post-petition transfers involve making payments to certain creditors, related parties, or other entities that impair creditors’ rights during the bankruptcy process. Improper post-petition transfers can also give rise to creditor claims, and companies may be required to unwind such transfers in some cases.

5. Failing to Respond Effectively to Creditor Objections

While most Chapter 11 bankruptcy proceedings—and especially those filed under Subchapter V—go fairly smoothly, creditors can raise objections on various grounds. If a creditor raises an objection to the dischargeability of its claim, responding in a timely and effective manner will be critical for resolving the objection as cost-effectively and favorably as possible.

What is involved in responding to an objection during the Chapter 11 reorganization process will depend on the specific grounds for the objection, the objection’s validity, and various other factors. As with all aspects of the bankruptcy process, informed decision-making is critical, and company owners and executives should work with their company’s bankruptcy counsel to determine how best to proceed.

6. Failing to Respond Effectively to Reclassification, Turnover, and Equitable Subordination Actions

The same applies to responding to reclassification, turnover, and equitable subordination actions during the Chapter 11 reorganization process. These are additional types of creditor claims that can disrupt—and, in some cases, threaten to derail—a company’s efforts to reorganize its debts and restore its viability as a going concern. Each presents its own unique risks and strategic considerations, and conducting a thorough assessment of a creditor’s claim is essential for determining how the company should respond.

7. Failing to Follow Through with the Chapter 11 Reorganization Process

In all cases, successfully navigating the Chapter 11 reorganization process and establishing a viable repayment plan requires persistence and a strong commitment to seeing it through. Abandoning the process or allowing other priorities to get in the way can lead to sunk costs, loss of creditor relationships, and other losses that can be difficult (if not impossible) to recover.

While company owners and executives can (and should) rely on their company’s bankruptcy counsel to manage the Chapter 11 process on their behalf, owners and executives need to remain actively involved. They need to be prepared to make informed, timely decisions and to provide key information and documentation when necessary. By working closely with their company’s bankruptcy counsel throughout the process, company owners and executives can help ensure it is as efficient and productive as possible.

Request a Call with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

Our lawyers have extensive experience guiding companies of all sizes through the Chapter 11 reorganization process. If you would like to speak with a Chapter 11 bankruptcy lawyer at our firm, please get in touch. Give us a call at 305-768-9909 or contact us online to arrange a free and confidential initial consultation.