Over the past few years, several big companies have filed for bankruptcy. Some closed their doors forever, while many remained open. If your business is struggling and you believe filing for Chapter 11 bankruptcy might present the best or only option, it is only natural for you to wonder whether you can keep operating your business.
Just like Chapter 11 bankruptcy for individuals, this type of filing operates more like restructuring debt than attempting to write it all off. Because of this, companies filing Chapter 11 might stay open for a while longer. Others recover and outlast the economic downturn that threatened them.
Purpose of Chapter 11
Fortune magazine reminds readers that Chapter 11 provides protections for the business against creditors. If the court determines the business might have enough assets and continued cash flow to remain open, it might allow the business to use financial reorganizing to fix its balance sheets. Here are some examples:
- Turning debt into equity so creditors become shareholders
- Trimming expenses, such as by closing a few stores, to shed some debt
- Breaking some contracts legally
- Selling to another company or individual buyer at an auction
Factors affecting remaining open
The difference between why some businesses remain open and why so many do not is the reason behind the bankruptcy. If the problem is only temporary, such as temporary state-mandated closings, the business might recover later on.
The level of debt might also play a role. Naturally, the more a company owes, the lower its chances of survival, if Chapter 11 does not restructure enough of its debts. Finally, the company’s adaptability plays a role. For instance, many retailers failed to recover after filing for bankruptcy, because they failed to adapt to the needs of online buyers.
Filing for Chapter 11 bankruptcy is generally a good way to restructure debt and continue to operate as owner, operator or both. However, it is no cure-all for business troubles.