Debunking Common Myths About Chapter 11 Bankruptcy
When businesses face financial difficulties, an option that can offer a path to recovery is Chapter 11 bankruptcy. Over the years, Chapter 11 bankruptcy has grown popular among businesses struggling with overwhelming debt. According to statistics released by the Administrative Office of the United States Court, in 2023, annual Chapter 11 bankruptcy filings totaled 7,456. However, many myths abound about Chapter 11 bankruptcy that may dissuade businesses from considering it as an option. Other myths cause business owners to go into the bankruptcy process with the wrong expectations. Below, we debunk some of the common myths about Chapter 11 bankruptcy.
Myth #1: Chapter 11 Bankruptcy Means a Business Will Shut Down
One of the most prevalent myths is that filing for Chapter 11 bankruptcy means going out of business. This is not true. Unlike the case with a Chapter 7 bankruptcy, where the aim is to liquidate company assets and pay off debts, a Chapter 11 bankruptcy is designed to help businesses restructure their debts while continuing with operations. Businesses going through Chapter 11 bankruptcy often downsize and make major shifts in operations as part of the process, but the objective is not liquidation. Indeed, some businesses do not survive Chapter 11 bankruptcy, but many companies emerge stronger and thrive.
Myth #2: Chapter 11 Bankruptcy Erases All Debts
Some people believe that filing for Chapter 11 bankruptcy will erase all of a business’s debts. This is not true. Chapter 11 bankruptcy allows companies to restructure or reorganize their debts. Business owners negotiate with creditors to develop a repayment plan that outlines how debts will be repaid over time. While some debts might be discharged or reduced, most remain and must be addressed as part of the restructuring process.
Myth #3: Chapter 11 Bankruptcy Is a Long, Drawn-Out Process
Indeed, some Chapter 11 cases take a long time to wrap up. Some companies languish in Chapter 11 bankruptcy proceedings for years. However, some Chapter 11 cases wrap up within a short time. Negotiating and drafting a reorganization plan before filing for Chapter 11 bankruptcy can help speed up the process. Negotiating with creditors and confirming a reorganization plan before filing an official petition can result in proceedings being completed in record time.
Myth #4: A Chapter 11 Bankruptcy Will Chase Away Customers and Vendors
Customers often will not know a business has filed for bankruptcy unless they are keen on keeping up with business news. That said, even if a customer finds out a business has filed for bankruptcy, it does not stop them from purchasing the business’s products or services if they are still being produced or sold. On the other hand, vendors are more likely to know when a business files for bankruptcy. If they are creditors, they will be notified of the case. A contract may require a vendor to maintain a relationship with the business. However, even those with the option of leaving may decide to stay.
Myth #5: Filing Chapter 11 Bankruptcy Means Handing Over Your Business to the Bankruptcy Trustee
The bankruptcy trustee’s role is to monitor the progress of a Chapter 11 bankruptcy and supervise its administration. However, they don’t take over the running of the business.
Contact Our Deerfield Chapter 11 Bankruptcy Attorney
Contact our Deerfield Beach Chapter 11 bankruptcy attorney at the Law Office of Adam I. Skolnik, P.A., to schedule a consultation to discuss Chapter 11 bankruptcy and whether it is the best plan for your business.
Source:
uscourts.gov/news/2024/01/26/bankruptcy-filings-rise-168-percent
