When Should a Company File Bankrupt?

On this blog we cover a lot of topics related to business bankruptcies. In the past year alone, we’ve covered topics ranging from the debtor-in-possession rules and bankruptcy “cramdowns” to considerations for restoring companies’ financial standing post-bankruptcy. But, one topic we haven’t really covered is: When should financially distressed companies start the bankruptcy process?

To be clear, there is no single “right” answer to this question. Deciding when to file for bankruptcy (and whether to file at all) requires a careful analysis conducted by an experienced Miami Chapter 11 bankruptcy lawyer. But, there are some general considerations involved, and carefully examining these considerations can help business owners start to make informed decisions about how and when to move forward.

5 Key Considerations for Deciding When to File for Bankruptcy Protection

So, when should a company file for bankruptcy protection? Some of they key considerations include:

1. Bankruptcy vs. Bankruptcy Alternatives

While filing for bankruptcy protection under Chapter 11 is a viable solution for struggling businesses in many cases, it isn’t necessarily the only solution available. Before initiating the bankruptcy process, it will be worth evaluating other potential options—which may include renegotiating with vendors or seeking an additional capital infusion, among others. If you’ve considered these other options and filing under Chapter 11 still makes sense, then it may be time to move forward.

2. Having a Plan to Maintain Solvency Post-Bankruptcy

Filing bankrupt under Chapter 11 involves reorganizing the company’s debts so that it can continue operating (the primary bankruptcy alternative is filing under Chapter 7, which involves liquidating the business’s assets and typically ends with winding up its final affairs). With this in mind, it is critical for company owners and executives to be confident that they have a plan for maintaining solvency post-bankruptcy. If reorganizing the company’s debts isn’t likely to solve its financial problems, then filing may not be worth it. Conversely, if reorganization will free up the capital the company needs to operate profitably, then it may make sense to start the process immediately.

3. Devoting the Necessary Time and Resources to the Bankruptcy Process

While company owners and executives can—and should—rely on experienced legal counsel to guide them through the business bankruptcy process, going through the process still requires company time and resources. If you need time to get ready for the process, taking this time (and using it as efficiently as possible) could be preferable to filing right away.

4. If Filing Makes Sense, There is Generally No Reason to Wait

With that said, once you decide that filing makes sense, there is generally no reason to wait. There generally aren’t material benefits to filing before or after the end of the year, and unnecessarily delaying a bankruptcy filing rarely, if ever, has benefits in other circumstances.

5. Waiting to File Can Have Adverse Consequences in Some Cases

On the other hand, waiting to file can have adverse consequences in some cases. For example, waiting can give creditors more opportunities to allege fraudulent conveyances and assert other defenses to discharge. Waiting can also give creditors the opportunity to pursue foreclosure and other means of collection before the bankruptcy process begins. Thus, when it comes to the question of, “When should a company file for bankruptcy?” the answer is generally, “As soon as the company is ready.”

Starting the Business Bankruptcy Process

If your company is ready to start the business bankruptcy process, what are your first steps? Initiating a business bankruptcy under Chapter 11 generally involves:

• Gathering All Necessary Financial Documentation – One of the first steps toward pursuing a Chapter 11 bankruptcy is to gather all necessary financial documentation. This will include bank account statements, accounts receivable, accounts payable, leases and loan agreements, and tax returns—among various other records. Once you engage experienced counsel to assist, your company’s counsel will be able to provide a comprehensive list of the documents needed to initiate the process.
• Engaging Experienced Business Bankruptcy Counsel – Given the importance of working with experienced counsel, companies that are contemplating reorganization should engage a Miami Chapter 11 bankruptcy lawyer promptly. Assisting with the identification and collection of necessary financial records is just one of many ways an experienced lawyer will be able to help.
• Choosing Between the Options That Are Available – In most cases, companies will have a few options for pursuing reorganization under Chapter 11. While a “traditional” Chapter 11 filing is always an option, this option involves unnecessary procedures (and costs) in many circumstances. Most companies will qualify to file a “small business case” or pursue a small business bankruptcy under Subchapter V, and both of these are generally more efficient and more cost-effective alternatives.
• Developing a Reorganization Plan – When pursuing a Chapter 11 bankruptcy, companies can—and generally should—go into the process with a reorganization plan ready to submit for the court’s approval. Under Subchapter V, creditors do not have the opportunity to file competing reorganization plans, and submitting a plan at the time of filing can help streamline the process.
• Filing Under Chapter 11 (or Subchapter V) – With the necessary prep work done, it’s time to file for bankruptcy under Chapter 11 (or Subchapter V). To avoid unnecessary issues and delays, companies must properly file all necessary forms and supporting documentation, and this, too, requires experienced legal representation. After initiating the process, company owners and executives should continue working closely with their bankruptcy counsel to ensure that they are making informed and strategic decisions throughout the process.

Request a Confidential Consultation with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

If you are considering a business bankruptcy and trying to decide if it makes sense to file, we can help. Our lawyers have extensive experience representing Florida businesses of all sizes in reorganization proceedings under Chapter 11 (and Subchapter V). To request a confidential consultation with a Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, please call 305-768-9909 or tell us how we can get in touch online today.