Chapter 11 bankruptcy is commonly called “reorganization bankruptcy” because struggling businesses use it to continue operating while gradually paying creditors. If your business is in debt, filing for Chapter 11 may be an option worth considering.
However, while it has its benefits, there are limitations or disadvantages you need to consider. As such, you may find it helpful to know the pros and cons of Chapter 11 before filing for it.
The pros to filing for Chapter 11 bankruptcy
Creditors must stop any collection efforts after you file for Chapter 11 bankruptcy. Because of this, your business is protected from any creditor seeking payment on a debt.
While you begin the process of repaying creditors, your business can continue operating even with its current ownership through a plan of reorganization (POR) under Chapter 11.
A viable alternative to a shutdown
If you cannot manage your debt, you may consider closing your business and liquidating your assets. But by filing for Chapter 11 bankruptcy, you can get extra time to regroup and develop a plan to repay debts. This can give your struggling business a second chance and help improve its financial standing.
The cons to filing for Chapter 11 bankruptcy
Loss of reputation
Once a business files for Chapter 11, the bankruptcy court will publish a filing notice in a public record. This can impact your brand and relationships with customers or suppliers, as this filing is easily accessible to the public.
Bankruptcy court approval
Once your business files for Chapter 11, you must follow the court-approved POR while continuing your goal of financial stability. On top of that, any decisions regarding your assets are subject to court approval.
Time-consuming and costly
Your business may need to rework contracts or leases as part of the POR and hire legal representatives to help oversee the process. While this may be time-consuming and costly, it can be necessary to ensure that it is done properly.
If you want to continue operating your business and restore its financial health, Chapter 11 bankruptcy may be a viable option. However, it is not the only one. You can also consider other bankruptcy chapters and debt relief options to make an informed decision that is best suited to your specific needs.