Bankruptcy may be the option for many small businesses today, especially with the current pandemic situation. It’s clear that many businesses are experiencing negative consequences from state shutdowns and decreased demand due to the COVID-19 virus. Many businesses are no longer able to pay their bills or repay their debts. Fortunately, many businesses may be able to file for bankruptcy. Bankruptcy has several benefits and a Chapter 11 bankruptcy for small businesses may be the ideal way for a company to restructure and continue operating. Chapter 11 bankruptcies are unique in that most small businesses couldn’t file this type of bankruptcy. However, the recent CARES Act has expanded the availability of this type of bankruptcy to many more small businesses.
Benefits of Filing A chapter 11 Bankruptcy
- Automatic Stay
Once filed, debtors are automatically entitled to protection from creditors. No provocative action from the creditor can take place and all litigation is put on hold. This prevents creditors from proceeding with any sale of business assets — and creates time and space for small businesses to get back on their feet.
- Right of Rejection
A Chapter 11 bankruptcy can provide debtors the right to reject uncomplimentary contracts which go against their business. They can reject contracts on lease agreements, which will give a better solution than selling or leasing their business to the creditors.
- Access to DIP
Debtors may be entitled to receive a new loan to boost their business using the debtor-in-possession DIP loan. The loan gives the lenders the upper hand over the existing creditors.
- Ability to Sell Off Items
Business can sell some of the business items to pay for the debts attached to the business
This benefit only exists during bankruptcy, and once its time depletes, businesses are exposed to paying or auctioning their assets to creditors.
A small business should consider bankruptcy as one of their last options. They can discuss whether bankruptcy is right for them by contacting a local bankruptcy attorney.
Factors to consider when a business is undergoing a Chapter 11 bankruptcy
Businesses should consider the following factors while they are in the process of considering a Chapter 11 bankruptcy.
- An entrepreneur should scrutinize their business and check whether it can work with the profit of its gain during the Chapter 11 process. These determine whether it will stand after the bankruptcy protection, and it can facilitate the loans.
- Is the business fit for the season, how effective and are the products on demand? All this is evidenced by the revenue flowing in during the chapter 11 period.
- During the season of losses, what is the relationship between the creditor and debtor?
- During hard times business owners can determine the relationship of the business and their workforce. If they are loyal and the quality of work they produce is strong, it can help to help curb debt problems.
- The cash flow or credit in the business: can the business owner access cash to help the company grow and come out of the situation?
- The relationship between lenders and debtors should be monitored.
- Does the business have non-essential assets that can be sold to help relieve the debts?
In conclusion, business owners should consider the above and see how well they are doing during the chapter 11 bankruptcy. They can change their business model and implement a more effective way to generate money. The finances will assist restructure the debts; if possible, they can negotiate the payment methods with the creditors without requiring the bankruptcy filing. However, if the business cannot, a Chapter 11 bankruptcy may be the best solution to help the business survive an economic downturn.