What Are the Benefits of Chapter 11 Bankruptcy?

What Are the Benefits of Chapter 11 Bankruptcy?

Whether your business is a large corporation or a smaller enterprise, chapter 11 bankruptcy could be a beneficial move to keep it alive during an economic crisis. There’s a lot to know, but here we will focus on how a chapter 11 filing can help your business recover.

Why File for Chapter 11 Bankruptcy?

If your business is struggling under the weight of debt and it isn’t a sole proprietorship, a chapter 11 bankruptcy filing can help to lighten the load. This is a way for your business to keep operating while working on paying down renegotiated debt through a court-approved reorganization plan. Solutions could include downshifting operations and cutting expenses, but the end goal is for a business to keep generating income, repositioning itself for future growth.

Immediate Benefits for Businesses

Directly after filing, an automatic stay typically goes into effect and pauses debt collection activity. This means a temporary end to collector calls, payment demands, and threats of asset seizure or lawsuits. With that room to breathe, a business owner can work with their team on debt consolidation and restructuring. This arrangement affords business owners a good deal of control and the exclusive right to propose a reorganization plan within a few months. 

Businesses may also have flexibility to get out from under agreements that become obsolete or prove to be commercially unsound. This can include equipment, real estate, or other long-term contracts deemed unfavorable or that are in default. For smaller businesses that need to conserve available funds, this is a major benefit.

A chapter 11 filing also prohibits business owners from paying down previously-incurred debts – those funds can help to rebuild the business and contribute to the repayment plan. Tax debt can also be wrapped into the proposal, and some unsecured debt can be substantially reduced or forgiven. 

Chapter 11 Bankruptcy Helps Companies Stay In Business

A business undergoing a chapter 11 filing could be able to secure debtor-in-possession financing which would enable it to continue operations during repayment planning. Business owners can then keep paying taxes, employee wages and benefits, purchasing supplies, and meeting rent, insurance, vendor, and other contractual agreements. 

Emergency relief for operations enables the court to grant authority for the company to keep up regular activities. That assurance can give employees, vendors, and customers peace of mind, knowing that bankruptcy will not cause severe business disruptions. Owners won’t have to lose the company and loyal customer base they’ve worked so hard to build. 

How Chapter 11 Bankruptcy Aids in Lending and Buying

Court-granted emergency relief enables lenders offering this financing to receive preferential treatment, often giving their loans repayment priority. Business owners could find it easier to obtain needed funding and at better rates than they did previously. And creditors can benefit too, since they are able to maximize their recoveries when a company remains in operation and is not forced to liquidate.

Another upside is that when an owner files for chapter 11 bankruptcy, they are able to sell their business, assets, and other property free from claims, liens, or liabilities. Not every business owner will be looking to sell and chapter 11 aims to keep businesses open. But if owners decide to sell off unwanted or unneeded assets to generate funds, they will come without strings attached and potential buyers could be willing to pay more upfront.

Does Chapter 11 Bankruptcy Filing Have Disadvantages?

Chapter 11 filings take time, so related fees and court costs will naturally be higher. Recent policy changes can help small-business debtors but the expense could still be a no-go. Other potential issues arise when court rulings require approval before company decisions are enacted. And one factor that is often misunderstood is that chapter 11 bankruptcy does not automatically discharge a business owner’s personal debts.

Trusted Advice from Bankruptcy Experts

It could seem that a chapter 11 filing is a real boon for all parties involved. But as is true with any major financial decision, caution is vital and reliable advice is fundamental. If your company is struggling and you aren’t sure how to proceed, get in touch with the experts at Hausen Law, LLC. Our Northeast Ohio Bankruptcy Attorneys are happy to weigh in. Call us directly or complete our online contact form to schedule a free, virtual bankruptcy consultation. We proudly serve the Akron, Canton, Wooster, and New Philadelphia communities and are here to help. Reach out today!

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