5 Common Misconceptions About Business Bankruptcy

5 Common Misconceptions about Filing for Business Bankruptcy

 If you are reading this, more than likely you are a business owner, your debt is piling up and you may be asking yourself:  How did this happen?  Am I ever going to find my way out?  Is saving my business possible?  What are my options?  This article addresses 5 common misconceptions about filing for business bankruptcy.  It is our goal to help you through this difficult process.

1.  “Filing for bankruptcy will put me out of business.”  While that is true in a chapter 7 case, in chapter 11 most businesses continue to operate.  Filing for chapter 11 gives a business breathing room and relief from their creditors during the reorganization period.  In a chapter 11 case, the debtor serves as the “Debtor in Possession” and can continue to operate its business.  The only way that a debtor can be involuntarily forced to stop operating in chapter 11 is by the Court appointment of a chapter 11 trustee, or if the Court converts the case to one under chapter 7 on the request of a creditor or the United States Trustee’s Office, either of which requires a showing that the debtor either cannot successfully reorganize, is mismanaging its affairs, or is not complying with the requirements of the Bankruptcy Code.

1. 2.    “If my business files bankruptcy, its assets will be taken and sold.”   Unlike in chapter 7, the filing of a chapter 11 bankruptcy does not result in a trustee is being appointed to sell assets of the business.  Instead, the debtor proposes a plan of reorganization in which the debtor specifies a treatment for all of its debts.  While the debtor can choose in its plan to sell some assets to help fund its plan, it does not have to do so.  It can instead fund its plan through business revenue.

1.  “If my business files for chapter 11 my customers won’t do business with it.”  A chapter 11 bankruptcy will NOT ruin your business’ reputation or good will.  As a matter of fact, chapter 11 bankruptcy tells your customers and creditors that you are committed to staying in business.  Letting creditors know that the business is filing, why the business is filing, what the filing means for them, and what they can expect to receive under the plan can go a long way to keeping the trust of your creditors and convincing them to vote to accept the chapter 11 plan of reorganization. 

4.  “My business will never get credit again.”  A chapter 11 bankruptcy does not prevent a business from acquiring credit in the future.  In some cases, businesses can even get credit during the bankruptcy process.  Some lenders actually specialize in “post-petition financing” for chapter 11 debtors in bankruptcy, however they tend to primarily do so for businesses that have assets that can be pledged as collateral.

5.  “I’ll file a chapter 7 business bankruptcy and I’ll get a fresh start.”  Unlike individuals, businesses do not receive a chapter 7 discharge.  The only exception is for an individual operating as a sole proprietorship, as the “fresh start” that is often spoken of in relation to chapter 7 is only for individuals.  For a business that is an entity (a corporation, LLC, or partnership), a chapter 7 is the death knell of a business.  It must cease all operations upon the filing of a chapter 7 petition.  For a business entity, a chapter 7 bankruptcy can allow for a final and orderly end to the business, particularly where there are assets that be sold by a trustee to make a payment to creditors.  In many cases, however, a chapter 7 for a business does not provide any real benefit.  Instead, it is the individuals that have personally guaranteed the debts of the business that can receive a benefit from chapter 7 by discharging their personal guarantees of business debt.

 In Albuquerque, Giddens & Gatton Law,amp; Jacobus. has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases and can specifically provide advice as to bankruptcy and its alternatives.

The New Mexico firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law,amp; P.C. at (505) 271-1053 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law,amp; P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico, 87111.