Considering Chapter 11: Key Pre-Filing Mistakes to Avoid
Filing for bankruptcy under Chapter 11 requires an informed and strategic approach. While reorganizing a business’s debts under Chapter 11 can have significant long-term financial benefits, it isn’t necessarily the best option in all scenarios—and, when it is the best option, mistakes early in the process can lead to unnecessary (and costly) issues later on. With this in mind, here are some key pre-filing mistakes to avoid from an experienced Miami Chapter 11 bankruptcy lawyer.
Failing to Balance the Benefits and Drawbacks of Filing
Making an informed decision about whether to file for reorganization under Chapter 11 requires a careful balancing of the relevant benefits and drawbacks. While filing under Chapter 11 can have significant benefits in the right circumstances, there are inherent drawbacks to the bankruptcy process, and these drawbacks may outweigh the benefits in some cases.
For example, one of the drawbacks of reorganizing under Chapter 11 is the formality of the process. This formality makes the process time-consuming and adds to the costs. The formal structure of the Chapter 11 bankruptcy process also provides various opportunities for creditors to fight to protect their claims in adversarial proceedings—which it may be possible to avoid through various alternatives.
Failing to Give Due Consideration to Possible Alternatives
This brings us to our second pre-filing mistake: when considering a Chapter 11 bankruptcy filing, it is also important to consider possible alternatives. This includes bankruptcy and non-bankruptcy alternatives such as:
- Filing for a Subchapter V small business bankruptcy
- Filing a “small business case” under the BAPCPA
- Renegotiating agreements with key creditors, vendors, and customers
- Entering into forbearance agreements with key creditors
- Conducting an informal debt restructuring outside of Chapter 11
These are in addition to alternatives such as filing for Chapter 7 bankruptcy and pursuing an assignment for the benefit of creditors (ABC). However, as these options focus on winding down a business’s operations and liquidating its assets, they are typically not viable alternatives for businesses focused on regaining financial stability.
Filing for Reorganization Under Chapter 11 Too Soon
Given the importance of considering alternatives, it is important not to file for Chapter 11 reorganization too soon. While businesses can generally back out of the reorganization process if necessary, at this stage, they will have already invested substantial resources in pursuing their Chapter 11 filings. For businesses in financial distress, this can have significant consequences—not only in terms of sunk costs but also in delaying a resolution to their financial struggles.
Deciding when to file for Chapter 11 can involve strategic considerations as well. When you speak with a Miami Chapter 11 bankruptcy lawyer at our firm about your company’s options, your lawyer will be able to walk you through everything you need to know.
Waiting Too Long to File for Reorganization Under Chapter 11
While it is important not to file for reorganization too soon, business owners and executives must also ensure that they do not wait too long to file. Waiting too long can lead to various adverse consequences, including (but not limited to):
- Facing collection actions that could have been prevented by triggering the automatic stay with a Chapter 11 filing;
- Executing transactions that are subject to being challenged (and potentially unwound) as fraudulent or preferential transfers; and,
- Increased risk of facing turnover actions and other adversary proceedings from dissatisfied creditors during the bankruptcy process.
Once the decision is made to file, it will usually make sense to begin the process promptly. If there is an immediate threat of foreclosure or another collection action, the initial Chapter 11 filing can be made on an emergency basis.
Filing Under Chapter 11 Instead of Subchapter V
As we mentioned above, filing for reorganization under Subchapter V is one potential alternative to filing for reorganization under Chapter 11. Subchapter V is a streamlined alternative to a traditional Chapter 11 filing and is available to eligible “small businesses” with less than $3,424,000 in qualifying noncontingent liquidated secured and unsecured debts.
For businesses that qualify to file under Subchapter V, it will make sense to pursue a Subchapter V filing instead of a Chapter 11 filing in virtually all cases. As the initial filing requirements for Subchapter V bankruptcies and Chapter 11 bankruptcies are different, business owners and executives must make the decision to pursue a Subchapter V case before they file.
Overlooking Assets, Revenue Sources, or Liabilities
When filing under Chapter 11 (including Subchapter V), businesses must ensure they make all required disclosures. This includes all required disclosures regarding assets, revenue sources, and liabilities. Failing to make required disclosures can lead to fraud allegations and other issues—and even if these issues are resolved, doing so will add time and costs to the reorganization process.
Overlooking Potential Roadblocks to Successful Reorganization
Finally, when assessing the viability of a Chapter 11 filing, business owners and executives should also consider any potential roadblocks to a successful reorganization. We’ve touched on some of these already—examples include:
- Allegations of fraudulent and preferential transfers
- Objections to dischargeability
- Priority disputes between creditors
- Reclassification litigation
- Turnover actions
While some issues may be avoidable, businesses preparing to undergo the reorganization process can—and should—take proactive measures to avoid them. When these measures are necessary, failing to take them can prove costly.
Need to Know More? Talk to a Miami Chapter 11 Bankruptcy Lawyer for Free
At Edelboim Lieberman, we help businesses of all sizes in South Florida reorganize their debts under Chapter 11 and pursue alternatives to Chapter 11 filings when warranted. To speak with an experienced Miami Chapter 11 bankruptcy lawyer at our firm in confidence, please call 305-768-9909 or request a free initial consultation online today.
