Close Menu

Staving Off Chapter 11: When Is (and Isn’t) It Feasible to Avoid a Business Bankruptcy?

When a company is struggling financially, filing for bankruptcy under Chapter 11 is an option that allows the company to stay in business while it works to regain financial stability. But, in this scenario, pursuing reorganization under Chapter 11 is not necessarily the only option that is available. Struggling companies may have a variety of other options as well, and an experienced Miami bankruptcy litigation attorney should be able to help owners and executives consider all of these options in light of the varying benefits, risks and probabilities involved.

5 Options for (Possibly) Avoiding a Chapter 11 Bankruptcy

To be clear, not all of the alternatives to a Chapter 11 filing are available in all cases. Additionally, some of these options are more straightforward than others, and, depending on a company’s specific circumstances, filing under Chapter 11 could simply be the most favorable and most cost-effective option. But, when dealing with financial distress, it is worth putting all of the options on the table and ensuring that you make an informed and strategic decision with your company’s best interests in mind.

Taking these considerations into account, here are five options that companies might be able to pursue to avoid a Chapter 11 bankruptcy:

1. Eliminating Unnecessary Operating Expenses

Eliminating unnecessary operating expenses can free up funds to pay a company’s debts as they come due. From subcontractors’ services that are no longer needed to underperforming profit centers and from overstaffing to overspending on travel and other non-essentials, companies may have a variety of monthly operating expenses that they can (and perhaps should) eliminate. While one or two unnecessary operating expenses might not have a material impact on a company’s monthly cash flow, when these expenses start to add up over time, they can become a problem that is worth addressing.

2. Eliminating Unnecessary Overhead

Eliminating unnecessary overhead can be an effective cost-cutting strategy for many companies as well. By definition, overhead expenses do not contribute directly to a company’s bottom line, and while some overhead expenses are necessary, others are not. If your company is spending more than it needs to on overhead, then cutting its overhead expenses could be a worthwhile step as well. Even if this isn’t enough to stave off a Chapter 11 filing on its own, it could help—and eliminating unnecessary overhead is an important step for responsibly managing a company’s finances post-bankruptcy as well.

3. Letting Leases, Licenses or Other Contracts Expire

Companies can also often achieve substantial cost savings by letting leases, licenses and other contracts expire. If your company can continue making payments under a lease, license or other contract until the expiration date arrives, this could ultimately prove to be the most cost-effective approach. Just keep in mind that some licenses and other contracts may renew automatically, and for those that don’t, the relevant personnel will need to be made aware that the company is not intending to pursue renewal.  

4. Restructuring or Renegotiating the Company’s Financial Obligations

If these steps are not enough to help your company to meet its financial obligations as they come due, then it may be time to consider restructuring or renegotiating these obligations with the company’s creditors. Creditors will be willing to consider restructuring or renegotiation in many cases—particularly when they know that the alternative is going through a Chapter 11 bankruptcy. There are a variety of options and strategies for doing so, and while there are no guarantees, an experienced Miami bankruptcy litigation attorney may be able to help you leverage your company’s present circumstances to secure more favorable terms.

5. Renegotiating (or Enforcing) Customers’ Payment Terms

Along with reducing your company’s monthly costs, another option may be to improve its positive cash flow. For example, if your company’s customers are currently paying their bills Net 30, renegotiating to Net 10 could provide the financial boost your company needs. Additionally (or alternatively), if any of your company’s customers are delinquent on their payments, now may be the time to enforce their obligation to pay.

Could Filing for Chapter 11 Bankruptcy Be Your Company’s Best Option?

While business owners and executives often assume that it is best to avoid a Chapter 11 bankruptcy if at all possible, this is not necessarily the case. Under the right circumstances, pursuing a business bankruptcy (or small business bankruptcy) under Chapter 11 can be a cost-effective solution that affords access to several benefits.

This includes (but is not limited to) benefits such as:

  • Automatic Stay – Filing for bankruptcy under Chapter 11 triggers an “automatic stay” that prevents the company’s creditors from pursuing collection. This can provide immediate relief for companies that are facing foreclosure, liens, levies and litigation.
  • Debtor-in-Possession Financing – Once a company files for bankruptcy under Chapter 11, it gains the opportunity to secure debtor-in-possession financing. This financing can provide much-needed financial relief in many cases.
  • Rejection of Leases and Other Executory Contracts – If a company cannot afford to wait for its leases or other executory contracts to expire, and if renegotiating is not on the table, filing for bankruptcy under Chapter 11 may provide the opportunity to reject these contracts despite the counterparties’ objections.

Ultimately, deciding how best to deal with financial instability requires a careful assessment of all relevant facts and circumstances and all available options. There is no single “right” answer, and while avoiding bankruptcy may be preferable in some scenarios, promptly initiating a Chapter 11 proceeding will be the best course of action in others.

Speak with a Miami Bankruptcy Litigation Attorney in Confidence

If you would like to discuss your company’s options with an experienced Miami bankruptcy litigation attorney, we invite you to get in touch. We represent companies throughout South Florida in both bankruptcy and non-bankruptcy matters.  To schedule a confidential initial consultation with one of our senior attorneys, please call 305-768-9909 or tell us how we can get in touch online today.

Facebook Twitter LinkedIn