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Pros and Cons of Chapter 11 Bankruptcy for Companies in Financial Distress

Like most business decisions, choosing to file for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code can have both pros and cons. While hiring a Miami Chapter 11 bankruptcy lawyer can make sense in a wide range of circumstances, it isn’t necessarily the best choice for all companies that are in financial distress.

With this in mind, making an informed decision involves understanding how a Chapter 11 filing would impact your company—both for better and for worse. Here is a look at some of the pros and cons of pursuing a business bankruptcy under Chapter 11 (including a small business bankruptcy under Subchapter V):

Benefits of Filing for Bankruptcy Under Chapter 11

Under the right circumstances, filing for bankruptcy under Chapter 11 (or Subchapter V) can have several benefits for businesses of all sizes. Some of the main benefits include:

1. The Ability to Continue Doing Business

After filing for bankruptcy under Chapter 11, the company is classified as a “debtor in possession.” This means that the company remains in possession of its assets, and this means that the company can continue operating. Additionally, in many cases (including small business cases under Subchapter V), the trustee’s role will be fairly minimal, meaning that the company’s owners and executives can largely maintain business as usual while its bankruptcy plays out in the background.

2. Protection Under the Automatic Stay

Filing for bankruptcy under Chapter 11 provides immediate protection under the automatic stay. The automatic stay prevents the company’s creditors from pursuing collection or otherwise attempting to enforce their debts. This alone can provide much-needed financial breathing room, and it can provide companies that are struggling financially with the time they need to work out a resolution that avoids going into default.

3. The Opportunity to Reduce Your Business’s Monthly Debt Load

Chapter 11 bankruptcies focus on “reorganizing” the company’s debts. In the end, a well-crafted reorganization plan will allow the company to comfortably make its restructured payments over time while still maintaining positive cash flow and allowing the company to invest in its future.

4. The Opportunity to Eliminate Certain Debts

While Chapter 11 focuses primarily on reorganization, companies can also eliminate certain debts through the Chapter 11 (or Subchapter V) bankruptcy process. Oftentimes, companies will be able to negotiate with certain creditors to resolve their debts for less than they owe—as this provides certainty above and beyond that afforded to creditors who still have outstanding claims.

5. Building a Solid Financial Foundation for Your Company’s Future

By allowing companies to get out of financial distress and pay down their debts, filing under Chapter 11 (or Subchapter V) affords the opportunity to build a solid financial foundation for their financial future. While pursuing bankruptcy can have short-term negative effects on a company’s credit (as discussed below), this concern will often be outweighed by the long-term benefits that filing can afford.

Drawbacks of Filing for Bankruptcy Under Chapter 11

So, that covers some of the main pros of pursuing a business bankruptcy. Now, what about the cons? Here are some potential drawbacks of filing for bankruptcy under Chapter 11:

1. Reorganizing Your Company’s Debts Means Repaying Your Company’s Debts

While reorganizing a company’s debts under Chapter 11 can serve as a means of reestablishing financial stability, it still ultimately means paying much of what the company owes. If this isn’t of interest (or simply isn’t viable), then filing under Chapter 11 most likely isn’t the best approach.  

2. Creditors Can Seek Relief from the Automatic Stay in Some Circumstances

While the automatic stay provides immediate relief for Chapter 11 filers, creditors can seek relief from the automatic stay in some circumstances. With this in mind, before filing, company owners and executives should consult with a Miami Chapter 11 bankruptcy lawyer to ensure that filing will be worthwhile.

3. Creditors Can Protect Their Full Right to Payment in Some Circumstances

Just as creditors can seek relief from the automatic stay in some circumstances, they can protect their right to full payment in some circumstances as well. Here, too, consulting with an experienced lawyer is the best way to ensure that filing under Chapter 11 makes sense under the circumstances at hand.

4. Navigating the Chapter 11 (or Subchapter V) Bankruptcy Process Takes Time

Aside from the immediate relief afforded by the automatic stay, securing relief under Chapter 11 (or Subchapter V) takes time. Before filing, company owners and executives should ensure that they are prepared to work with their company’s bankruptcy counsel throughout the process to secure a positive outcome.

5. Filing for Bankruptcy Can Impair Your Company’s Access to Credit in the Coming Years

While filing for bankruptcy under Chapter 11 can put companies on the path toward long-term financial stability, it can negatively impact their access to credit in the coming years. If this will interfere with your short-term business goals, then you will want to speak with your company’s counsel about any other options it has available.

What if Filing Under Chapter 11 Isn’t the Right Choice?

Let’s say you weigh the pros and cons, and you ultimately decide that filing under Chapter 11 isn’t the right choice for your company. In this scenario, what are the other options that your company might have available? Some examples of potential alternatives to a Chapter 11 (or Subchapter V) filing include:

  • Equity infusion
  • Internal restructuring
  • Informal workout (debt restructuring)
  • Assignment for the benefit of creditors
  • Liquidation under Chapter 7

Schedule a Free Initial Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman  

If you are considering a Chapter 11 (or Subchapter V) business bankruptcy filing in Florida, our lawyers can help you make informed and strategic decisions about your next steps. We represent financially distressed companies statewide. To schedule a free initial consultation with a Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, give us a call at 305-768-9909 or contact us confidentially online today.

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