Think You Know About Chapter 11 Bankruptcy? Think Again
Because Chapter 11 bankruptcies tend to make news more than other chapters of bankruptcies do, a lot of people get information about it. But all that media attention also can lead to a lot of misconceptions and falsities when it comes to Chapter 11 bankruptcy. Despite what you may hear in the news, there are probably a lot of things you think you don’t know about Chapter 11 – or things that you think are true, but which are not.
Every Chapter 11 bankruptcy is the same – Chapter 11 bankruptcy actually has different rules for different sized companies, designed to make a Chapter 11 bankruptcy easier and more efficient. There’s even a “modified” Chapter 11 bankruptcy, for smaller businesses, which avoids many of the larger procedural hurdles of Chapter 11, such as avoiding any creditor committees, and allowing a judge, instead of creditors, to approve of a reorganization plan.
Chapter 11 takes a long time – Again, in some cases, with the modified Chapter 11, the bankruptcy process is sped up significantly. There have even been stories of companies emerging from Chapter 11 bankruptcy in less than 24 hours!
In many cases, you can work out a reorganization pan with your creditors before your bankruptcy is even filed. The creditors vote on the plan, and once your Chapter 11 is filed, the difficult work is done—it’s just a matter of getting a judge’s approval.
You will lose vendors and contacts – You may be afraid that once you file for bankruptcy, everybody you contract with or employ will disappear. Your reputation will be ruined to the extent that your customers leave. But actually, this is simply not true.
The reality is that in many cases, even creditors who are owed money opt to continue their business relationship with you. Many times these contractors are high priority creditors, meaning that they are almost certain to be paid even during the bankruptcy.
You can’t afford to file Chapter 11 – Filing Chapter 11 can be expensive (more expensive for larger companies where the Chapter 11 case may go on longer). With longer cases come more expenses, both in costs and legal fees.
But often, to help your business survive the bankruptcy, financing can be obtained to pay your company’s bankruptcy related expenses. Many Chapter 11 debtors rely on this financing, which helps them pay their expenses.
Chapter 11 means going out of business – This may not be such a common misconception; we all have heard of large companies that file for Chapter 11, only to emerge, still operating their business. There is a reason why Chapter 11 is called “reorganization,” as it provides a path for businesses to continue their operations.
Many come out of bankruptcy even stronger than they were beforehand (think of comics, and now movie giant, Marvel, which filed for bankruptcy in the 90s).