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As the most complex type of bankruptcy, Chapter 11 bankruptcy can be confusing and misunderstood, especially because it is very different from other types of bankruptcy. At Wernick Law, we concentrate the majority of our practice on Chapter 11 debtor representation. In this discussion, we explain some of the most common bankruptcy misconceptions and myths about the Chapter 11 process.
The most significant and common bankruptcy misconception about Chapter 11 for a business is that the process will require the business to close and stop operations. In fact, in many cases, just the opposite is true. Chapter 11 gives a business the opportunity to make a new start and get the business back on track.
Chapter 11, which is termed reorganization bankruptcy in the U.S. Bankruptcy Code, provides a process for a business to obtain bankruptcy court protection while remaining in possession of the business and continuing operations. Successful completion of the Chapter 11 process enables a company to establish streamlined operations, while eliminating the burden of legal issues.
The ability to continue business operations distinguishes Chapter 11 from other types of bankruptcy. The type of bankruptcy a business files makes a significant difference in the immediate and long-term results of the bankruptcy process, including whether the owner can continue the business during and after bankruptcy. If you are a business owner struggling with business debt, our Chapter 11 attorneys at Wernick Law can make certain that you have all the information you need to make the right decision for yourself and your business.
A second common misconception is that the bankruptcy court or U.S. trustee runs a business during the Chapter 11 process, which simply is not true. Under the Bankruptcy Code, a debtor who files a Chapter 11 petition becomes the debtor in possession of the business, with all the rights and powers to run the business. The business owner effectively serves as their own trustee and has all the fiduciary duties of a trustee. The U.S. trustee does not run the business, but does monitor the debtor’s compliance with reporting and other requirements during the bankruptcy process.
Our previous blog post, How to File for Bankruptcy Chapter 11, provides basic information about Chapter 11 and an overview of how the standard business process works.
Large companies such as American Airlines, General Motors, Bed Bath & Beyond, and others get a lot of media attention when they file for Chapter 11 bankruptcy. That coverage often leaves medium and small businesses under the impression that Chapter 11 is only designed to help big corporations, which is not at all the case. Any business of any size may file for Chapter 11 protection, whether the business is a corporation, LLC, partnership or sole proprietorship.
The Bankruptcy Code even provides a streamlined process for eligible small businesses. More information about the small business process is provided in our article, How Does Chapter 11, Subchapter V Small Business Bankruptcy Work?
Business owners often fear they will lose lenders, customers, and suppliers if they file for bankruptcy, which is not what typically happens in reality.
In most cases, Chapter 11 bankruptcy gives lenders and suppliers reassurance that they will get paid over time for amounts already owed. The process also helps free up capital for businesses to cover new costs and expenses going forward; therefore, lenders and suppliers or vendors are not likely to stop doing business after a Chapter 11 petition is filed.
Clients and customers often don’t even know about the bankruptcy filing. If they do find out, they see the business carrying on as usual and most likely view the bankruptcy as a commitment to continuing and improving operations in the future, which makes them unlikely to discontinue doing business with the company.
Widespread misinformation — much of it on the internet — leads businesses to think that they can complete the Chapter 11 bankruptcy process without getting help from a lawyer. Attempting this type of bankruptcy without legal counsel is full of pitfalls for unwary business owners.
Chapter 11 is the most complex type and time-consuming type of bankruptcy, with detailed requirements and timelines throughout the process. Without experienced legal guidance, there are numerous opportunities to make mistakes that can create significant legal problems and derail the entire process.
Filing a Chapter 11 bankruptcy petition does not guarantee a successful outcome, even with legal representation. Guidance from an experienced business bankruptcy lawyer significantly improves the chances of succeeding in reorganization confirmation, rather than having the bankruptcy court dismiss the petition or convert it to a Chapter 7 liquidation.
Before filing any bankruptcy petition, a business owner should understand all the bankruptcy options available in their circumstances and evaluate the full implications of pursuing a certain type of bankruptcy. Talking with an experienced bankruptcy lawyer before proceeding ensures that a business owner makes a fully informed decision and chooses the most suitable strategy for achieving their ultimate goals.
At Wernick Law, we concentrate the majority of our practice on Chapter 11 debtor representation. We welcome Florida businesses wishing to learn more about Chapter 11 reorganization bankruptcy or Subchapter V, Chapter 11 small business reorganization to schedule a consultation by calling 561-961-0922 or using the online contact form.
Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.
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