Bankruptcy always feels like one of those much maligned terms for businesses—but just over a decade ago, Chapter 11 protection was quite common. However, as we continue to live in lockdowns, the reality of the matter is that you may want to keep your options open. The outlook may not be ideal, the revenue may not be recovering, and according to a recent article from David Dragich in CFO, commercial Chapter 11 filings were up 48% in May compared with one year ago, with a total of 724 new petitions.
However, as you look at your options to keep the business running, it’s important to know what Chapter 11 Bankruptcy protection entails. Knowing what it is and what it isn’t could go a long way in ensuring you use this option wisely, and today, we’d like to discuss some of the most common myths you want to think about before you consider this.
Myth: Bankruptcy Means Failure/Going out of Business
One of the biggest myths out there is that bankruptcy means that you’ve failed or your company is going out of business. Fake news—at least as it pertains to Chapter 11.
Just because a business files for bankruptcy does not mean it is going out of business. While a Chapter 7 business bankruptcy filing involves liquidation, Chapter 11 allows a business to restructure its debts and remain in operation. A business going through Chapter 11 often downsizes as part of the process, but the objective is reorganization, not liquidation. Some companies don’t survive the Chapter 11 process, but many others, including household names such as Marvel Entertainment and General Motors, successfully emerge and thrive.
In fact, even the threat of Chapter 11 may help you and might even be a strategic move. As we discussed in a recent blog, there are alternatives to Chapter 11 that can keep your business operating without going through the process, and such a move may help you gain leverage against creditors.
Myth: Chapter 11 Filings Are High Profile and Result in a Long, Drawn-Out Process
Another myth is that bankruptcy protection is going to derail your reputation and result in decades of time spent recovering. Wrong.
“There have been companies that have languished in Chapter 11 for years, but a bankruptcy case does not need to drag on endlessly. In fact, Chapter 11 cases can wrap up in as little as 24 hours. In 2019, Sungard Availability Services emerged from bankruptcy a mere 19 hours after its case was filed.”
Additionally, many believe that this could scare off customers or vendors. For customers, most won’t even know it’s happening. Vendors will receive notice, but according to Dragich, “unless a debtor chooses to terminate a relationship, most vendors and suppliers opt to stick around—even when they’re owed a pre-petition debt.”
Myth: A One-Size-Fits-All Approach Will Work
Bankruptcy protection filings are going to be as unique as the company who files. As mentioned above, some companies can have prepackaged 19-hour filings and others can spend years on the process, meaning that a plan needs to be tailored to your company needs.
“A financially distressed company can seek Chapter 11 protection to halt litigation and collection efforts, negotiate with its creditors, and propose and confirm a plan of reorganization that allows the company to emerge from bankruptcy with a fresh start. While that may be the traditional use of the process, Chapter 11 can be used also as a strategic tool to effectuate different outcomes, including the sale of all or substantially all of the company’s assets.
Indeed, many companies that enter Chapter 11 have no intention of reorganizing as a going concern. The primary purpose of many cases is to quickly conduct a sale (called a “363 sale”) in which a buyer acquires the debtor’s assets. The proceeds are used to pay creditor claims. “
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Many companies have the ability to get in and get out of a Chapter 11 Bankruptcy filing with minimal stress, positioning themselves for a strong future and a smarter, leaner organization. However, it pays to understand how you will approach the process and understand that there’s going to be a lot of scrutiny into your business.
Having the right advice and a community of professionals to support you during a time like that matters—and the Controllers Council is there to deliver.
Controllers Council is a national community and platform of Controllers, Accounting and Finance professionals focused on accounting best practices, information and resources, recognition and networking. Offering both individual and corporate memberships, membership offers a variety of benefits that will help you for years to come. If you’re ready to accelerate your accounting skills, get to know more about joining the Controllers Council here.
Additional Resources
Three Alternatives to Chapter 11 Bankruptcy Organization Leaders Should Consider
Layoffs, Furloughs, and Other Paths to Survive: A Controller’s View
