Hiring A Bankruptcy Attorney For Peace Of Mind

How Declaring Bankruptcy Could Help—Or Hinder—Your Business

7 August 2018

Gabriel Freeman

With around two out of every three businesses failing within 10 years after they open their doors, becoming an entrepreneur isn't for the weak at heart. And when the economy slumps or local conditions prevent your business from being all it can be, you may wonder whether you have any options short of shutting down for good.

In some cases, filing for Chapter 11 bankruptcy protection can help you reorganize business debts and remain afloat. However, a Chapter 11 isn't right for all situations and shouldn't be entered into lightly. Read on to learn more about some of the ways a Chapter 11 filing can help (or hinder) a business.

How Bankruptcy Can Help a Business

A Chapter 11 bankruptcy is very different from a Chapter 7 bankruptcy, which most people are a bit better acquainted with. In a Chapter 7, a debtor will enter into a legal agreement to discharge all outstanding consumer debts and give back any collateral that's used to secure these debts. (A debtor can also opt to reaffirm certain debts, like a mortgage or car loan, and continue making payments to avoid having to give up those assets.)

A Chapter 11, on the other hand, doesn't discharge debts, but reorganizes and streamlines them. Many businesses run into cash flow issues when multiple payments come due during the same time of the month or during a slow part of the year. By adjusting repayment schedules, a business owner can provide themselves with some much-needed breathing room without necessarily reducing the interest rate or total repayment amount for their loans.

In other cases, a Chapter 11 bankruptcy can be an alternative to simply going out of business and leaving your creditors without any legal recourse. By reorganizing debts and placing them in order of priority (with secured debts like mortgages or employee payroll expenses at the top of the list), the bankruptcy trustee can work with you to ensure that these prioritized debts are repaid and that any remaining funds available are used to knock out these smaller debts or to pay other crucial business-related expenses.

Because your creditors have a vested interest in your business remaining solvent, they're not likely to continue hounding you for payment after you've entered bankruptcy. But even if they were inclined to do so, the Bankruptcy Code puts the kibosh on that. Once a bankruptcy has been filed, any creditors are required to submit their claim for payment to the bankruptcy court, not to your business directly. Once you're no longer spending hours a day juggling vendor issues or dealing with creditor phone calls, you'll be in a better position to keep your business moving toward a profitable future.  

How Bankruptcy Can Hinder a Business

Bankruptcy isn't without its downsides. Just as a personal bankruptcy can impact one's credit score, a business bankruptcy may make it harder for the business to take out additional loans or lines of credit. And when you're already dealing with cash flow problems, handicapping your ability to access more cash may put you under even more financial strain.

However, the Bankruptcy Code does provide lenders with an incentive to offer financing to distressed businesses. This financing is called Debtor in Possession (DIP) financing and essentially allows the lender to jump to the head of the line when it comes to repayment. Because the lender enjoys a greater priority than other vendors, this loan is less risky than it might otherwise be.

The lenders who are passed over by a DIP lender are allowed to formally object, and the bankruptcy court will issue a ruling that determines whether you're permitted to proceed with DIP financing over the creditors' objections. In some cases, DIP financing is the only way to keep a business solvent, and creditors who recognize that reality may be hesitant to object. But in other cases, creditors may see the writing on the wall and want only to ensure that they receive as much repayment as possible.

Because bankruptcy is a deeply personal decision, whether on your own behalf or on behalf of your business, it pays to talk to an attorney for more info before you go any further.

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