Chapter 11 Bankruptcy

Chapter 11 Bankruptcy Has Major Disadvantages

The ultimate restructuring method is a Chapter 11 bankruptcy but their are consequences. Chapter 11 does not mean that you are out of business like a Chapter 7. Chapter 11, under the Federal Bankruptcy Act, means that you have the chance to reorganize your business debt and the creditors involved are forced to agree to your plan. You cannot be sued for anything that occurred before filing a Chapter 11. This applies to secured creditors as well. You cannot get evicted, nor can your assets be attached. In other words, you are fully protected from your creditors leverage.

There are two major disadvantages of a Chapter 11. First, there is a stigma attached to bankruptcy that may cause you problems with your customers. This is because many small businesses that file Chapter 11 are converted to Chapter 7 and then subsequently liquidated. That should concern any company that depends on supplies from a business that has filed Chapter 11. For example, a printer who printed publications for various companies and organizations was aware of how his customers felt about the reliability of supply. A notice of Chapter 11 to these customers would have frightened the customers away. The second disadvantage is that suppliers become very cautious when doing business with a company in Chapter 11. Virtually all open account credit will dry up, and borrowing money will be very difficult as well.

Years later, these disadvantages will still haunt you. However, Chapter 11 still may be your only remaining option, especially if there are no other alternatives available. Chapter 11 can save a business but the odds of success are very low. On the upside, here is an example. Your eventual reorganization plan could call for all unsecured debt to be frozen and set up on a three-year payout at no interest, the first year paying only 20%, the second year 30%, and the last year 50%. That last year could even be renegotiated when it becomes due. The secured creditors cannot easily foreclose, and their past due payments could also fall into the three-year plan. The lease on your building or facilities would also fall under the same protection. You can even break a union contract in a Chapter 11 filing.

However, when business conditions are not that severe, an arrangement with the creditors similar to a Chapter 11 can be negotiated without actually filing a bankruptcy or informing your customers about a bankruptcy. There are sensible advantages to avoiding a Chapter 11. One is that your customers will not have to be alarmed by a bankruptcy filing because there will not be any. Another advantage is the cost. It is noticeably less expensive because you may not need an attorney but instead an experience business consultant.

Contact the Turnaround Group to learn more about the alternatives to Chapter 11 Bankruptcy.

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