When Is It Time to Consider a Business Bankruptcy?

While filing for bankruptcy under Chapter 11 can provide much-needed financial relief to struggling businesses, a bankruptcy filing isn’t the right choice in all scenarios. Among many other factors, timing is a key consideration, and business owners and executives must ensure that when they decide to pursue bankruptcy (if they decide to pursue bankruptcy), they are able to achieve the maximum benefits available.

10 Key Considerations for Pursuing a Business Bankruptcy Under Chapter 11 (Including Subchapter 5)

So, when is it time to consider a business bankruptcy? Here are 10 key considerations:

1. Can You Meet the Chapter 11 Filing Requirements?

Companies seeking bankruptcy relief under Chapter 11 must be able to meet several filing requirements. Deficient filings can lead to unnecessary costs and delays, and in some cases, they can limit the relief that is available.

If a company can’t meet the Chapter 11 filing requirements, this doesn’t necessarily mean that filing for bankruptcy is off of the table—it might just mean that a filing would be premature at this stage. When pursuing a business bankruptcy, thorough preparation is extremely important, and company owners and executives must ensure that they are ready to timely meet their companies’ obligations throughout the bankruptcy process.

Learn more: Chapter 11 Bankruptcy Filing Requirements: An Overview

2. Is Your Company Facing Litigation?

In some circumstances, company owners and executives will be forced to consider a business bankruptcy due to the threat of litigation. While filing for bankruptcy can stave off litigation in some cases, filing for bankruptcy carries its own costs and risks that require careful consideration. Additionally, filing for bankruptcy does not provide complete protection from litigation, and plaintiffs can still pursue claims against companies that have filed under Chapter 11 in some cases.

Learn more: When Should Businesses Consider Bankruptcy as an Alternative to Litigation (or Arbitration)?

3. Are There Better Alternatives Available?

While filing for bankruptcy can be a good option for struggling companies, there are alternatives to bankruptcy that can be even more beneficial in some circumstances. Before pursuing a Chapter 11 filing, it is important to carefully consider all of these alternatives and ensure that you are making an informed decision with your company’s and its owners’ long-term best interests in mind.

Learn more: Business Bankruptcy: Options and Alternatives for Companies in Financial Distress

4. Are There Any Roadblocks in Your Company’s Way?

While filing for a business bankruptcy under Chapter 11 is a process that follows a well-defined set of steps and procedures, there are various roadblocks that have the potential to pop up along the way. When evaluating the feasibility of a Chapter 11 filing, it is important to assess these roadblocks proactively—and prepare to overcome them if necessary. These roadblocks can arise at all stages of the process, and, as a business owner or executive, the last thing you want is to invest in the process only to find that it cannot be completed.

Learn more: 10 Common Roadblocks in Chapter 11 Bankruptcy Cases

5. Are the Benefits of a Chapter 11 Filing the Benefits Your Company Needs?

Filing for bankruptcy under Chapter 11 affords access to several benefits for companies that are struggling financially. These benefits range from the automatic stay (which prevents creditors from pursuing collection actions) to access to debtor-in-possession financing. But, these benefits won’t solve all companies’ financial problems in all cases. When a Chapter 11 filing doesn’t make sense, company owners and executives will instead want to pursue one or more of the other alternatives they have available.

Learn more: A Closer Look at Some of the Benefits (and Limitations) of a Chapter 11 Business Bankruptcy

6. Do the Benefits Outweigh the Drawbacks?

When considering the benefits of a Chapter 11 business bankruptcy filing, it is important to consider the drawbacks as well. Business bankruptcy filings can have negative consequences, and if these negative consequences outweigh the benefits, then this is another situation in which business owners and executives will want to consider their other options. Some examples of potential drawbacks include public disclosure (and the potential for negative publicity, restrictions on certain financial transactions, and monitoring by the bankruptcy trustee.

Learn more: Are There Any Drawbacks to Filing a Business Bankruptcy Under Chapter 11?

7. Can Any of the Business’s Creditors Assert a Preference Claim?

Preference claims allow a business’s creditors to seek to void payments and other transfers made by the business both before and after the business files for bankruptcy under Chapter 11. Not only do preference claims add to the costs of going through the bankruptcy process, but they can potentially lead to issues outside of the business’s bankruptcy proceeding as well.

Learn more: When Can Creditors Assert Preference Claims in Business Bankruptcy Cases?

8. Do Any of the Business’s Creditors Have Defenses to Discharge?

Another risk for businesses contemplating a Chapter 11 bankruptcy is the risk that one or more creditors will assert a defense to discharge. These defenses allow creditors to protect their claims—even if the business negotiates a reorganization plan with its other creditors.

Learn more: Defenses to Discharge in Business Bankruptcy Cases Under Section 523

9. Do Any of the Business’s Creditors Have Claims for Non-Dischargeability?

Under Section 727 of the U.S. Bankruptcy Code, various issues can render individual business debts non-dischargeable. There are also issues under Section 727 that can prevent businesses from obtaining a discharge of debts entirely. Along with considering the risk of preference claims and defenses to discharge, business owners and executives must work with their counsel to evaluate any potential claims for non-dischargeability as well.

Learn more: Claims for Non-Dischargeability in Business Bankruptcy Cases Under Section 727

10. What is the Likelihood of a Request for Revocation of Discharge?

Finally, even if a business successfully obtains a discharge through a Chapter 11 bankruptcy, there is still a possibility that one or more creditors (or the bankruptcy trustee) will request a revocation of discharge. This is a risk that requires proactive consideration as well and that business owners and executives must keep in mind as they navigate the process.

Learn more: When Can the Bankruptcy Court Order a Revocation of Discharge Under Chapter 11?

Speak with a Business Bankruptcy Lawyer in Confidence

Do you have questions about pursuing a business bankruptcy? If so, we’re here to help. To schedule a confidential consultation with a business bankruptcy lawyer at Edelboim Lieberman, please call 305-768-9909 or request an appointment online today.