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Understand how a Chapter 11 bankruptcy can keep a business afloat

On Behalf of | Jun 3, 2024 | Bankruptcy

Alaska businesses face many obstacles as they try to keep operating each day. This struggle is often viewed in the context of smaller businesses, but large corporations are also confronted with overwhelming debt and a series of challenges that lead to them considering options to remain afloat.

One way to keep moving forward rather than winding down the business is to file for Chapter 11 bankruptcy. The mere term “bankruptcy” often implies that people are unable to pay their debts and simply want to walk away. That is usually the case in personal bankruptcies like a Chapter 7 liquidation. However, with a Chapter 11, the objective is to reorganize.

What does a Chapter 11 do?

When a company files for Chapter 11, it gives them the opportunity to restructure while the debtor retains control of the business. This is known as being in possession. They can keep operating the business while still making decisions to benefit it. For example, while the reorganization is underway, they can still borrow money if the court gives them the approval to do so.

The business itself will formulate a plan to reorganize. Common steps include negotiating with creditors to find better terms to pay debts. For example, a loan could be extended from when it was initially due. Of course, if the business is no longer viable or there is no reasonable way to get out of debt, a liquidation could be recommended.

The key to a Chapter 11 is that it allows the business to keep going while the reorganization is taking place. They can accrue income as they strive for options to address their debt and other issues that cause problems for them in the search for profitability. Creditors will generally be willing to let a business file for Chapter 11 as they will want to continue the relationship, provided the plan is a sound one.

Bankruptcy is not something to fear

Many large and recognizable businesses and entities have filed for Chapter 11, continued operating and come back stronger. It does not mean the business is shirking its responsibilities. Instead, it is a viable strategy to address debt the business could not pay while staying in operation.

Still, there are issues that must be considered beforehand. Some businesses are better served to try and avoid bankruptcy altogether. They might have too much debt and obstacles to stay in operation to make Chapter 11 wise. Or there could be opportunities to merge with another business. Regardless, it is useful to have assistance with determining the preferable strategy and to know how to proceed.