How can Chapter 11 help restore businesses?

Filing for Chapter 11 bankruptcy does not mean your business will permanently close. In fact, many businesses successfully go through Chapter 11 and reemerge to become profitable operations. This is because Chapter 11 allows companies to perform certain actions to eliminate debt and make themselves better able to generate profit.

According to The Washington Post, Chapter 11 provides a legal way for businesses to reorganize themselves while halting creditor efforts to collect on past debts and liabilities. While not every bankruptcy is exactly the same, indebted businesses tend to perform the same or similar actions as they try to climb back to financial solvency.

Removing unprofitable parts

When reorganizing your business, you will likely identify the parts of your operation that still make money and seek to get rid of the parts that are draining your finances. If you have multiple retail stores and two of them are consistent money losers, you might decide to shut them down. You may also use Chapter 11 to sell off company subsidiaries, vehicles, inventory, anything that will not help your company generate profit.

Voiding expensive contracts

Your business might be bound by expensive contracts that you cannot break without risking a breach of contract lawsuit. These contracts may compel you to continue to pay certain fees that do nothing but add to your debt. Under Chapter 11 bankruptcy, you can ask a court to void your contracts. With the approval of the court, you may release your business from burdensome real estate leases, labor agreements, and supply contracts.

Negotiating with creditors

Going through Chapter 11 does not mean you will get rid of all your debt. Your bankruptcy judge might void your unsecured debts, but will likely insist that you pay your secured debts. You will likely have to negotiate with your secured debt creditors on a plan to repay at least most of the debt. You might work out a reduction of your debt or a repayment plan that your business can handle.