Debunking 4 Chapter 11 Bankruptcy Myths

Sometimes referred to as “reorganization bankruptcy,” a chapter 11 bankruptcy filing is generally (but not exclusively) made by corporations or partnerships that are facing a verifiably-unsustainable debt scenario. The filing allows businesses to remain operational and pay creditors back over time through future profits, and per a court-approved payment plan.

Given that chapter 11 bankruptcy is the most complex of all bankruptcy cases, there is no shortage of misunderstandings, misinterpretations, and outright myths. Below, we debunk 4 of the most persistent of these falsehoods:

Myth: Business owners that file for chapter 11 bankruptcy must give up control of their organization.

The truth is that, unless in cases of fraud, dishonesty or gross incompetence, business owners are entitled to continue running their operations as the reorganization is executed (usually 3-5 years after the initial filing).

However, as noted by the Law Office of Charles Huber, certain decisions with significant financial implications — such as selling assets, expanding operations, and starting or ending a rental agreement — must be made with court’s permission. Provided that such decisions are prudent and in the business’s (and hence its creditors’) best interest, such approval is typically forthcoming.

Myth: Business owners that file for chapter 11 bankruptcy must accept the reorganization plan proposed by creditors.

The truth is that business owners have the first opportunity to propose a reorganization plan, which may include downsizing, selling assets, shuttering unprofitable business lines, renegotiating debts, and so on. Provided that the plan is viable, realistic and fair to creditors, there is a strong likelihood that the court will approve it.

Myth: The court is on the side of creditors and will invariably rule in their favor on requests and appeals.

In terms of executing the law, the court is neither on the side of debtors nor creditors. The court is pragmatic, and is primarily interested in one fundamental thing: a structured, compliant process.

Myth: If a chapter 11 filing is ultimately unsuccessful, then the business owner is personally liable for remaining debts.

While many chapter 11 filings are successful, some of them, despite the good faith efforts of business owners, do not allow for continued operations. In such cases, the business owner would file for chapter 7 bankruptcy and liquidate. He or she would receive the same rights as other individuals filing for chapter 7, such as protections against losing registered retirement savings, losing a primary home, and so on.

The Bottom Line

When it comes to a bankruptcy filing, myths aren’t just problematic: they can be financially devastating. As such, make sure that you speak with an experienced bankruptcy attorney to learn about all available options — which may include filing for chapter 11 — so that you can make a smart and safe decision based on facts, not fictions.

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