Myths and Misconceptions About Chapter 11 Bankruptcy
The chapter 11 bankruptcy process is perhaps one of the most unknown in the bankruptcy world. Many of us know people who have filed for Chapter 7 or Chapter 13 bankruptcy. But few of us know anyone who has filed Chapter 11, putting aside all the stories of large companies and retailers that are filing because of the COVID crisis.
Myths About Chapter 11
There are many things about Chapter 11 that you may have thought that you knew – but that in fact, are false.
Chapter 11 is long, difficult, and takes time – Like any legal case or process, more complex cases can take longer. But that doesn’t mean that every Chapter 11 case takes a long time to finish up.
In fact, there is even a process where the debtor can work with its creditors, and try to negotiate a workout plan, even before the case is filed. The parties all agree on the plan, and then the case is filed with the court simply having to approve of the plan the debtor and creditors have already agreed to.
Filing for Chapter 11 means going out of business – In fact, one of the benefits of Chapter 11 is that you don’t have to go out of business. Chapter 11 is also called reorganization, because, as the name implies, the idea is for the debtor company (or person) to emerge from the bankruptcy and be able to keep doing business.
The business may downsize, it may have to trim operations, change owners, or pay some creditors and not others. In some cases, a new buyer for the business is found, and it operates under new ownership. But despite all of that, many big companies (including Marvel comics) have filed Chapter 11 bankruptcy, and come out even stronger in the long run.
Filing for Chapter 11 means the business always keeps operating – In some cases, a business may want to wrap up operations, and a Chapter 11 bankruptcy can do that also. A Chapter 11 can assist the debtor company in selling its assets, paying creditors, and coming out of the bankruptcy with no debt after the business closes.
Small businesses can’t afford a Chapter 11 bankruptcy – It is true that Chapter 11 bankruptcy is more expensive than the other, traditionally individual bankruptcies, such as Chapters 7 or 13. But in many cases, if the business can’t afford the costs or legal fees of a Chapter 11, financing can be provided to companies to allow them to complete the bankruptcy.
You’ll lose your vendors – Your contracts with your vendors remain enforceable (until, and of, the court says otherwise). Most vital vendors will continue to be paid through the bankruptcy. Even in the absence of a contract, most vendors opt to retain their relationships with companies that file for Chapter 11.