Filing for Chapter 11 Bankruptcy Again: When Does It Make Sense to Pursue a “Chapter 22?”

Filing for bankruptcy under Chapter 11 affords the opportunity for struggling companies to restore their financial stability, rebuild their credit and start looking toward the future. But, there are no guarantees and even companies that emerge from Chapter 11 with what initially looks like a manageable payment plan will often find themselves struggling to fully regain their financial footing. When this happens, the company’s owners and executives must make a critical decision: Should they hire a Miami bankruptcy litigation attorney to file under Chapter 11 again? Or should they consider other options?

Pursuing a second bankruptcy under Chapter 11 is often referred to as filing a “Chapter 22.” However, there is no Chapter 22 in the U.S. Bankruptcy Code, and a second Chapter 11 filing is fundamentally the same as a first. With that said, there are some additional considerations involved in seeking to reorganize a company’s debts for a second time, and company owners and executives must be confident that they are making informed decisions before they commit to moving forward.

Key Questions for Companies Considering a Second Chapter 11 Bankruptcy

So, what should company owners and executives consider when contemplating a second business bankruptcy under Chapter 11? Here are some key questions:

Why Are the Company’s Financial Struggles Continuing (or Why Have They Returned)?

When contemplating a second Chapter 11 bankruptcy, it is critical to understand why the company is in the position of needing to consider reorganizing its debts for a second time. There are several possibilities, including (but not limited to):  

• Management Issues – Sometimes, continuing or recurring financial struggles following a Chapter 11 bankruptcy result will be indicative of poor corporate management. When this is the case, internal restructuring could be a necessary step—either instead of or in parallel with a second Chapter 11 filing.
• Business Decisions That Didn’t Pan Out – Along with broader management issues, individual business decisions can also lead to a second round of financial distress. If your company made an investment or took a risk that didn’t pan out, this could be a scenario in which a second Chapter 11 filing is warranted.
• New Competition – If a company has experienced a loss of revenue due to new competition, this could make the company’s reorganized debt load under its prior Chapter 11 filing untenable. In this scenario, filing again could make sense as a stepping stone toward investing in new innovations or resources that allow the company to regain its prior market share.
• Market Forces – Along with new competition, various other market forces can lead to financial distress for companies as well. In these scenarios, company owners and executives must carefully assess whether reorganizing the company’s debts for a second time is a viable long-term solution.
• An Ineffective Reorganization Plan – Companies that have previously filed under Chapter 11 can also face financial distress if they failed to restructure their debts effectively. Here, filing again may make sense, but it will be especially important to choose a Miami bankruptcy litigation attorney who can help maximize the benefits of the process.

Each of these has very different implications, and this means that each raises different considerations when assessing the company’s next steps. While a second Chapter 11 filing could ultimately make sense in any of these scenarios, understanding why a second Chapter 11 filing is necessary is critical for ensuring that the process is as effective as possible.

What Relief Can the Company Achieve Through a Second Chapter 11 Filing?

Company owners and executives contemplating a “Chapter 22” must also determine what relief the company will be able to achieve through a second Chapter 11 filing. Can the company sufficiently reduce its debt load to restore positive cash flow and build toward a financially stable future? Or is a repeat of the company’s present circumstances more likely? By realistically assessing these types of questions before initiating the bankruptcy process, owners and executives can ensure that they are using the company’s resources as effectively as possible.  

What Worked (and What Didn’t) with the Company’s Previous Reorganization Plan?

As company owners and executives contemplate a second go-round under Chapter 11, they should also work with the company’s bankruptcy counsel to examine what worked (and what didn’t) with its previous reorganization plan. If the decision is made to move forward, this will present an opportunity to leverage any lessons learned from the company’s previous filing and ensure that its “Chapter 22” provides the greatest long-term benefits and opportunities.

How Will the Company’s Creditors React to a Second Chapter 11 Filing?

Another key consideration when contemplating a second business bankruptcy under Chapter 11 is how the company’s creditors will react to the filing. With a second attempt at reorganization, the company’s creditors may be more hesitant to take a hands-off approach—and they may be more likely to seek relief from the automatic stay or fight to protect their claims in court. If a second Chapter 11 filing is likely to prove more challenging and costly than the first, this is something that the company’s owners and executives will need to consider carefully when making decisions about how to move forward.

Are There Better Alternatives Available?

When making decisions about how to move forward, company owners and executives who are considering a second Chapter 11 filing should also assess whether there are better alternatives available. In some circumstances, companies can achieve the financial relief they need without going through the bankruptcy process. If this is the case, “Chapter 22” may not be the best option.

Discuss Your Company’s Options with a Miami Bankruptcy Litigation Attorney at Edelboim Lieberman

If you are considering a second Chapter 11 filing and would like to know more about the considerations involved, we invite you to contact us for a free consultation. To schedule an appointment with a Miami bankruptcy litigation attorney at Edelboim Lieberman, please call 305-768-9909 or tell us how we can reach you online today.