The financial scenarios that could lead to a bankruptcy filing vary significantly between businesses. The current economic climate has caused an increase in Chapter 11 filings as companies attempt to salvage their business. For companies focused on the retail and hospitality industries, these economic stressors have been more pronounced.
Extinguishing misconceptions about bankruptcy filings
There are many misconceptions about the various ways that bankruptcy filings are used to remedy a company’s outstanding debts. Many owners feel that bankruptcy has an inherent stigma against it, while others may feel that it is a method of ignoring debts without consequences. As business owners, you need to understand the complex considerations that go into a bankruptcy filing:
Maintaining business operations: Bankruptcy doesn’t have to mean the end of a company, depending on the filing designation. Where Chapter 7 involves a liquidation of the business’s assets, a Chapter 11 bankruptcy filing is more about reorganization and finding efficient ways to pay of debts in a more sustainable manner. Chapter 11 can include a certain amount of downsizing and liquidation, but many businesses can survive this process and reorganize successfully. Here are some of the effects of filing Chapter 11:
Ownership: Many Chapter 11 cases result in a change in ownership. Once a company reorganizes, its ownership may shift from partners or equity holders to creditors. In the reorganization plan creditors have a higher priority than shareholders regarding the company’s assets.
Collection efforts: Chapter 11 provides certain protections against debt collection efforts and litigation against the company for unpaid debts.
Strategic Use: Sometimes, companies will use the potential implementation of bankruptcy as a method to negotiate better terms for a real property lease.
Cash flow: Any liquid assets typically have to go to operating a business, plus to pay the legal costs, administration costs, and payments according to the reorganization plan.
Debtor-in-possession (DIP) financing: This is a special type of funding devised for companies in bankruptcy. Once a company files for Chapter 11 bankruptcy protection, that company may be able to access DIP financing. The funding available under this designation can go to the reorganization of the company operating under this new status. This funding can be helpful because it can have priority over existing debts, claims and equity.
Finding the best choice for your business
Chapter 11 is arranged to benefit corporate reorganization over liquidation. Depending on your situation, filing for Chapter 11 protection can provide much-needed aid to companies in distress and who could use debtor-in-possession financing. A court will designate what financing plan should will go along with these protections. It is crucial to explore the options for maintaining your business and getting beyond a bad financial situation.