Misconceptions with a Chapter 11 bankruptcy filing

In a time of many unknowns, businesses in New York and elsewhere are making major business decisions to ensure the longevity of their businesses is protected. Unfortunately, when difficult financial times are occurring, not all businesses can stay afloat or remain operational. This is when difficult and major decisions must be made. Filing for bankruptcy may seem like a last resort, and it may rightfully so be; however, it is often a valuable business step to take.

Filing for Chapter 11 bankruptcy

Compared to a year ago, commercial Chapter 11 filings are up 48%. This comes as no surprise, as the pandemic has not been pleasant for the survival of many companies. A decade ago, a Chapter 11 bankruptcy was used for businesses seeking refuge during the financial crisis. Now, this form of bankruptcy is surging, as businesses are seeking to navigate the current financial crisis. Despite this being a common term used a decade ago, many misconceptions remain about this type of bankruptcy.

Misconceptions

There are five fairly common misconceptions about Chapter 11 bankruptcy. First, there is the misconceptions that filing for a Chapter 11 means going out of business. This is not often the case, as this allows for a business to restructure their debts so they can remain in operation. However, it does often mean downsizing.

The second misconception is that a Chapter 11 requires a one-size fits-all plan. While it is frequently used to reorganize debts, a Chapter 11 filing could be used to sell a business. The third misconception is that it is a long, drown-out process. While it is true that it can take years for a company to complete the process, it is also true that they can be completed rather quickly, some only taking a day.

The fourth misconception is that a bankrupt company will have plenty of money because it doesn’t have to pay back its creditors. It is almost always the case that a debtor will need to seek a debtor-in-possession financing in order to maintain operational costs and pay back debts. Finally, the fifth misconception is that customers and vendors will flee. So long as the matter involves a filing petition and the filing fee is paid, it is likely that customers will likely never know unless they come across it in the newspaper.

Make and informed decision

Because there are many misconceptions about a Chapter 11 filing and any bankruptcy filing for that matter, it is important that businesses fully understand what options they have and which route is best for them. For many, this must be a quick decision, so it is imperative that one understands what rights they have so the best choice for their matter can be made.