Bankruptcy is a strange and complicated place in American business, and owners of struggling small companies can become entranced by it. Its most famous corner is called Chapter 11, and to many a business person in trouble, it looks like a cure-all: you do not go out of business and lose your livelihood forever, but you do get the relief of having the leash of debt you can no longer carry loosened. It is a process for a business to reorganize its debts while continuing to operate. The aim is to regain financial stability. It is commonly called reorganization bankruptcy, and while individuals can file it, businesses file it most often.
Chapter 7 has a grim simplicity: a court-appointed trustee sells off as much of the business as possible to pay debts, and then whatever debt is left is usually forgiven. By contrast, Chapter 11 bankruptcy is primarily filed by businesses that want to stay in business: the company reorganizes its debt and repays it as it becomes profitable again. That’s harder, but if you get it right, you and the business live to see another day. But Chapter 11 also has drawbacks, so don’t rush into it. At Delancey Street, the owners we talk to are often weighing it against other kinds of debt relief, so here are the six downsides first, then the four upsides.
Think Twice Before Declaring Chapter 11 Bankruptcy
The first downside is simple. It does not erase debts. Instead the business continues operating, but according to a plan approved by the court to repay creditors.
The second is credit. If you’re mulling Chapter 11, brace yourself for a cash-only world. You won’t have access to credit for years, and while you’re in Chapter 11 you’re forbidden to take on new loans that would begin after the bankruptcy. Life after Chapter 11 is often solitary: most banks aren’t eager to give such a battered business a post-bankruptcy line of credit.
Third, you give up a good deal of control. Don’t go into the process thinking it will solve all your problems while continuing to let you make unilateral decisions about your business. If you go into Chapter 11 you’re not done running the show, but you’re no longer alone. The court is now your partner, and a tough one. You can’t expand, or sell assets that aren’t covered in the plan for your turnaround, or act the way you did before. And if the court finds the business is dishonest, fraudulent or grossly incompetent, it will appoint a trustee to run the show during the bankruptcy.
Fourth, the cost. Chapter 11 is the most complicated and expensive kind of bankruptcy filing. There’s a steep, court-assessed fee, which in some cases can be paid in installments. The decision to file is a big one, and entrepreneurs should seek both legal and financial advice before making it.
Fifth, it is slow. Think twice before declaring Chapter 11 bankruptcy. The process can take several years. To file, you must provide a comprehensive statement of your finances, including assets, liabilities, contracts, expenditures and leases.
The sixth downside may be the most important. Chapter 11 is not a Get Out of Jail Free card. Party City was the largest party goods retailer in North America when it entered Chapter 11 in early 2023. It got 150 million dollars to keep the party going, and by the end of 2023, it had repaid 1 billion dollars in debt by restructuring, closing 800 stores, and renegotiating leases. All that bold action could not overcome the remaining 800 million dollars of debt. In December 2024 it said it would auction off its leases and pull the plug. Don’t be blinded by the message — that Chapter 11 will keep you alive.
The Biggest Upside to Chapter 11
It isn’t all bad news, however. The biggest upside to Chapter 11 is this: the company gets to keep operating, and while the bankruptcy court oversees things, the company gets to keep control of its assets while it carries out the restructuring plan. This is why corporations and partnerships that want to keep their businesses alive most commonly use it. It gives the company a chance to succeed.
Second, you get a reprieve. You’ll be under the protection of something called the automatic stay (no more pressure from creditors) and possibly granted emergency relief so you can get your act together.
Third, the monthly burden can shrink. You’ll be in a position to eliminate some debts completely and negotiate the size and terms of others so that you have a lower monthly payment. It can mean downsizing, selling off assets or renegotiating contracts. The court can agree to the plan or work with the business to devise a different one.
The fourth upside is easy to overlook. One big benefit for businesses: additional time to pay federal tax debt.
It’s a major undertaking that will cost time and money, and it should not be taken lightly. Before pulling the trigger, assess the company’s situation: Can it successfully reorganize, repay its debts, and create a profitable business model? Be sure to consult with a lawyer and a financial adviser, and consider any and all alternatives, such as negotiating directly with creditors. For companies with a solid reorganization plan, Chapter 11 can allow the business to keep its doors open and even turn a profit.
Business Debt Settlement
Negotiating with creditors is where Delancey Street comes in. We are a business debt settlement company, not a law firm. Our advisors negotiate with merchant cash advance funders and lenders for less than the full balance owed. We specialize in merchant cash advance debt including stacked advances, we cover SBA loans, and equipment finance and lines of credit too. Negotiating directly with creditors is one of the options to try before bankruptcy. If your case cannot be won, or a cheaper option exists, we say so on the first call. When bankruptcy, such as Subchapter V, is the better path, we route owners to bankruptcy counsel. The first consultation is free and confidential.
