Why Business Bankruptcy Isn’t Your Only Choice

Bankruptcy books

Alternatives to bankruptcy as a path to conflict resolution in business

When business aspirations aren't realized, it may seem like bankruptcy is the only choice. Sometimes, it may be the best one. But often, there's a misunderstanding of how bankruptcy works, what's required to make sure it's the best option, and how different types of business situations can lead to alternatives.

Fortunately, there are several alternatives that can help you manage or even discharge your debts without resorting to business bankruptcy. One good first step is to consult with an experienced business bankruptcy attorney. These professionals have the explicit expertise to navigate bankruptcy scenarios.

Understanding Business Bankruptcy and Its Consequences

Business bankruptcy is a complex legal process that can have significant consequences on your financial standing. It's essential to understand what business bankruptcy is, its types, and its long-term impact on your business’s finances before considering it as an option.

Bankruptcy is a legal process that allows businesses to discharge or restructure their debts when they can't repay them. It provides relief from creditors' collections and can sometimes offer a fresh start. However, it's essential to note that not all debts can be discharged in bankruptcy, and the process can be costly and time-consuming.

In some cases, bankruptcy may be the best option for businesses struggling with overwhelming debt. It can provide a way to eliminate or restructure debts, stop creditor harassment, and prevent foreclosure or repossession of assets. However, bankruptcy should only be considered after exploring all other options, such as debt consolidation/refinancing, selling assets, or negotiating with creditors.

Types of Business Bankruptcy

There are different types of business bankruptcy, each with its own set of rules and requirements. The most common types of consumer bankruptcy are Chapter 7 and Chapter 11.

  • Chapter 7 Bankruptcy (Liquidation): Chapter 7 bankruptcy is often referred to as "liquidation" bankruptcy. Under Chapter 7, a business stops all operations and goes completely out of business. Then, a trustee is appointed to liquidate (sell) the company's assets. The money from the sale is used to pay off the debt, which may include debts to creditors and investors. The goal is to use the asset sales to pay off the debts so that the business owners can start afresh. The process is relatively quick, usually lasting a few months. Chapter 7 is generally for businesses that don't see a future in continuing operations. It's a way for a business to deal with overwhelming debt and move on.

Chapter 11 Bankruptcy (Reorganization): Chapter 11 bankruptcy is typically referred to as "reorganization" bankruptcy. Unlike Chapter 7, businesses undergoing Chapter 11 bankruptcy often continue operating. Chapter 11 allows a business to restructure its debts and obligations. This means the business may be able to reduce its debts, terminate burdensome contracts, and modify payment terms. Businesses in Chapter 11 have to propose a reorganization plan. This plan has to be approved by creditors, bondholders, and stockholders, as well as the bankruptcy court. A business going through Chapter 11 is usually overseen by a trustee (in some cases the debtor may continue to control operations). The process of Chapter 11 is more complex and can be significantly longer than Chapter 7, sometimes taking several years to conclude. Chapter 11 is generally for businesses that have hit a rough patch but believe they can become profitable again with some reorganization.

The Long-term Effects of Business Bankruptcy

The long-term effects of business bankruptcy can vary based on a number of factors including the type of bankruptcy filed, the industry in which the business operates, and the specific circumstances surrounding the bankruptcy. Here are some of the potential long-term effects.

  • Credit Rating and Access to Capital: Filing for bankruptcy will almost certainly lower a business's credit rating. This can make it more difficult and expensive for a business to obtain financing in the future. It might also make suppliers less likely to extend credit terms.
  • Asset Liquidation: In the case of Chapter 7 bankruptcy, the business's assets will be liquidated to pay off creditors. This means that the business will not be able to continue operating, at least in the same form.
  • Stigma and Reputation: Bankruptcy can affect how customers, suppliers, and competitors perceive a business. For some, it may create doubts about the business's viability and reliability as a partner.
  • Operational Restructuring: For companies that file for Chapter 11, the bankruptcy process may involve significant operational restructuring. This can include closing unprofitable divisions, laying off employees, renegotiating contracts, and other changes aimed at improving the company's financial performance. This might lead to a leaner, more focused business.
  • Ownership and Control Changes: In a Chapter 11 bankruptcy, equity owners may lose some or all of their ownership stake in the business, especially if they had to bring in debtor-in-possession financing or if the bankruptcy plan involves issuing new shares to creditors.
  • Management Changes: Sometimes, as a part of the bankruptcy process, changes in management and the board of directors might be mandated. This can be either a condition set by the creditors or a strategic move to regain investor confidence.
  • Legal and Regulatory Constraints: After emerging from bankruptcy, the business might operate under certain constraints and oversight, possibly including court supervision, especially if it went through Chapter 11 bankruptcy.
  • Fresh Start: On the positive side, a successful restructuring through Chapter 11 can give a business a fresh start. It can shed excessive debt and unprofitable operations, and start anew with a more sustainable business model.
  • Employee Morale and Retention: Bankruptcy can have varying effects on employee morale. For some, the uncertainty surrounding bankruptcy can lead to lower morale and higher turnover. For others, a successful restructuring can improve morale by creating a more stable work environment.
  • Supplier and Customer Relationships: Post-bankruptcy, the business might have to rebuild relationships with suppliers and customers. Some might be wary to engage fearing financial instability, while others might see the restructured business as more reliable after shedding excessive liabilities.

It’s worth mentioning that the long-term effects of business bankruptcy can also be influenced by broader economic conditions and the business’s ability to effectively implement changes during and after the bankruptcy process. As such, the outcome of a bankruptcy is not always predictable, and companies should seek advice from financial and bankruptcy experts when navigating this complex process.

What Businesses Should Look Into Before Filing for Bankruptcy

Before a business considers filing for bankruptcy, there are several alternative strategies that it might employ to address financial challenges. Some alternatives to filing for bankruptcy include the following.

  • Negotiation with Creditors: One of the first steps a business can take when facing financial difficulty is to negotiate with its creditors. The business might be able to work out a deal to reduce the debt, extend the repayment period, or lower the interest rate.
  • Refinancing: Refinancing existing debt can also be an option. By taking out a new loan with more favorable terms, the business might be able to reduce its monthly payments and free up cash flow.
  • Selling Assets: If a business owns valuable assets that are not essential to its operations, it might consider selling them to raise funds. This can be an effective way to pay down debt without impacting the core business operations.
  • Cutting Costs: Implementing cost-cutting measures can help a business reduce its expenses and improve its financial position. This might include reducing staff, cutting back on non-essential expenditures, or renegotiating contracts with suppliers.
  • Equity Financing: Raising capital through equity financing, which involves selling shares of the company to investors, can also be an alternative. This can provide the necessary funds to pay down debt and invest in growing the business.
  • Debt Restructuring Outside of Bankruptcy: Similar to Chapter 11, but without the formal bankruptcy process, a company can work with a financial consultant or bankruptcy attorney to create a debt restructuring plan. This might involve negotiations with creditors to modify the terms of loans, extending maturities, or even partially forgiving some debt.
  • Finding New Revenue Streams: Sometimes the issue is not just about reducing costs, but also about increasing income. This might involve launching a new product, entering a new market, or finding other ways to generate additional revenue.
  • Merger or Acquisition: In some cases, merging with another company or being acquired can be a viable alternative to business bankruptcy. This can allow the business to benefit from the resources and capabilities of the other company.
  • Bringing in a Partner or Investor: Sometimes bringing in a strategic partner or investor who understands the industry and is willing to put in capital and expertise can turn around the financial situation.
  • Out-of-Court Workouts: Often known as a composition or an assignment for the benefit of creditors, this is an informal agreement between a business and its creditors for repayment. This is less formal than a bankruptcy proceeding and can often be less costly and quicker.
  • Small Business Administration (SBA) Assistance: For small businesses in New York, the Small Business Administration (SBA) and other government entities might offer programs that provide financial assistance or counseling.

It’s important to note that the feasibility and effectiveness of these alternatives can vary depending on the specific circumstances of the business. Consultation with financial advisors, bankruptcy attorneys, and other professionals is crucial for making informed decisions regarding the best course of action for a struggling business.

Closing Thoughts on Business Bankruptcy in New York

If you feel like you’re out of options, there are ways to lessen the blow of business bankruptcy. And, if elected wisely, bankruptcy can be the most advantageous and flexible option for your business—offering the best chance for financial rehabilitation and future commercial success.

Before you despair, let us lend our expertise. Contact us today to meet with one of our expert business bankruptcy attorneys.