Companies can use bankruptcy as a last resort, after spending years working to regain their original financial status after a failed investment or an economic downturn. However, businesses also use bankruptcy as a way to avoid financial or legal obligations. Those in this situation can file for Chapter 11, which will reorganize funds and help the company renegotiate or cancel high-interest leases and help to downsize any satellite locations that are not profitable. Some bankruptcy claims are used to help organizations get rid of the entities that are failing as part of the company.
There is a major difference between declaring bankruptcy as an individual and declaring it as a business. A large well-known corporation has the means to positively acknowledge their bankruptcy through publicity and virtually saves the profitable part of the company while establishing bankruptcy to release them from certain debts and unfulfilled leases. Chapter 11 focuses on the debts and allows negotiations between the organization and the banks where both parties come to an agreement in regards to those debts, usually avoiding financial as well as legal obligations.
For those businesses, there are a few major reasons why bankruptcy is not anything more than a strategy. One of these major points is liquidation, which forces the company to try and sell liquid assets to a new entity so the organization can save any possible capital. This also makes it easy to eliminate paying any of their suppliers’ bills. Another reason for filing for Chapter 11 is to turn short-term debt into long-term debt, which virtually provides the corporation with a longer period to make those payments. With the newfound capital from the liquidation process, businesses inject that back into the company after the reorganization plan goes into effect so that it can be used to pay off those long-term debts.
One of the most strategic methods organizations use Chapter 11 bankruptcy for is to remove themselves from leases and other contractual obligations and allows them to renegotiate payments. In addition to avoiding detrimentally high payments, with successful planning, a business can avoid criminal liability through a repayment plan situation.
Think of bankruptcy as just another way to do business without experiencing the devastating effects that could occur otherwise. If you are a business owner and are thinking of filing for bankruptcy, contact attorney Michael Siddons at (610) 225-7500 to help you decide what course of action is best for your situation.