The use of Chapter 11 has changed over the years. Not too long ago, Chapter 11 was used as a form of protection.
Debunking Myths in Small Business Chapter 11
Today, the economy is not in the best place. Some businesses have found new ways to thrive and rebranded themselves during these difficult times. Other businesses have not had the same fortune and are barely surviving.
If you are one of those businesses that are just hanging on and hoping that a positive financial change is just around the corner, you may want to learn more about bankruptcy myths and facts.
While it is not a pleasant consideration, it may be something you need to think about. The best thing you can do for yourself and your business is to understand the facts and prepare yourself for what may happen.
Continue reading to find out the facts and incorrect assumptions about bankruptcy. You can also find out about legal remedies that may help you during these turbulent times.
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Myth #1 – Filing Chapter 11 Means the End of Your Business
Many business owners believe that filing Chapter 11 means they have to liquidate their business and lock their doors forever. One of the benefits of filing Chapter 11 is that it allows the business to restructure.
The intent of Chapter 11 is to allow the business to reorganize and refine processes. This is the time to determine what works and keep that while getting rid of what does not work. This process may allow the business to sell items to make money and pay down some debt.
Typically, filing Chapter 11 means the business is either in or going into a place where the debts cannot be paid. Taking a new approach may be exactly what the business needs.
Myth #2 – Bankruptcy is a Public and Long Process
Yes, it is true there are some people with whom a business interacts, such as vendors, that will receive notice of Chapter 11. This usually does not scare vendors away immediately.
The customers of the business will probably have no knowledge of the filing. Sure, you have heard of companies that have endured a long-drawn-out Chapter 11, but that does not have to be the case and typically is not the norm. It is possible to finish all Chapter 11 proceedings in a short period of time.
It is not going to be a reputation killer. Most other businesses understand the concept of Chapter 11 and typically know why the business has gone that route.
Myth #3 – There is Only One Way to File Bankruptcy
This is not a one size fits all type of process. The bankruptcy process will be unique to the business need.
Each company needs a plan that makes sense for them. In some cases, businesses file Chapter 11 to pause the collections of those they own money. This helps the business negotiate deals with their creditors to put them in a better and fresh position.
Other companies use the filing of Chapter 11 to give them the ability to sell off assets.
Myth #4 – Not Paying Debts Means Jail Time
This is not true. In the United States, you do not go to jail for not paying your debts. You would go to jail if you falsified records or stole.
However, not paying debt is not enough to send you to jail. If you are tempted to adjust the books to reduce the burden on the business, do not do that.
There are legal ways that you can find relief from your debt. It is much better if you go down that path. Not paying your debts may make it challenging to get credit in the future, but at least that future will not be in prison.
Fact #1 – Chapter 11 Allows you to Financially Reorganize
When a business files Chapter 11, they go through the court system and present a plan to repay their debts. In the plan, the business outlines how they are going to get the money to repay the debt, which is usually a negotiated amount.
The negotiated amount is often lower than what the business owes. In the plan, the business usually outlines what they plan to sell to acquire the money.
This repayment plan must be approved by the court system. Once approved, the business must take action to put the plan in place.
Fact #2 – An Individual Can File Chapter 11
While Chapter 13 may be the more common way to file bankruptcy, Chapter 11 is used by individuals, especially ones that own a small business, if they exceed the requirements for Chapter 13.
Usually, the amount of their debt exceeds the allowable amount. The limits have a regular adjustment based on the consumer price index.
The limit for non-contingent unsecured debt is $394,725, and the limit for secured debt is $1,184,200.
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