Despite its stigma, a business struggling with legal or financial issues can reap the benefits of bankruptcy. Business bankruptcy can give a company the time and space it needs to regroup and create a plan of reorganization. Alternatively, a business can use that time and space to orderly liquidate its assets. In either instance, the effect can be the protection of the value of the business and its assets. 

The Benefits of Bankruptcy for Various Bankruptcy Types

There are many benefits of bankruptcy, one of the most prominent being the different types of bankruptcy offered to struggling businesses. When a business is considering the benefits of bankruptcy to address its legal or financial issues, its main option is a traditional Chapter 11 bankruptcy. A Chapter 11 can be a reorganizing case, or a liquidating case, depending on the business’ end goals. In addition, and where applicable, a business can elect to proceed as a small business Chapter 11 case, or as the relatively new Subchapter V bankruptcy, which is a streamlined Chapter 11 bankruptcy case. These three (3) Chapter 11 options all permit the business to proceed through bankruptcy as a “debtor in possession”. This means that the business is in charge of its own reorganization, and has many powers ascribed to a “trustee” in bankruptcy. The goal of a Chapter 11 bankruptcy case is to have the bankruptcy court confirm a plan to address the business’ legal and financial issues.

Compare a Chapter 11 “debtor in possession” case, where the business has the powers of a hypothetical Chapter 7 trustee, against a Chapter 7 case, where there is actually a Chapter 7 trustee assigned to the case. A business in Chapter 7 bankruptcy case legally hands over control of its business assets and operations to a Chapter 7 trustee. A business in Chapter 7 bankruptcy has no control over that trustee, and no control over how its business operations and assets will be handled by that trustee. One of the benefits of bankruptcy, specifically a Chapter 7 case, is that the process allows a business to hand over all liquidation obligations to a Chapter 7 trustee. This may be beneficial where the business seeks the least amount of control or involvement with its own liquidations.

The overarching benefits of bankruptcy in a Chapter 7 case is that debts are ultimately paid with whatever funds remain after liquidation of all of the business operations and assets. After a Chapter 7 case is completed, there is no discharge given to the business, but there are no assets remaining to pay any outstanding debts. In a Chapter 11 case, creditors are paid some or all of the amount of the debt they are owed under a business’ plan of reorganization. The amount paid under a Chapter 11 plan depends on a number of factors, including the statutory priority of the debt, the amount of assets and equity owned by the business, and many other factors.  that must be confirmed by the bankruptcy court. In Chapter 11 cases, a portion of debts can be paid over time, and usually up to a five (5) year period, with a final discharge of any remaining debts accomplished at the end of that plan of reorganization.


voluntary liquidation of an insolvent company

Stay of Creditor Debt Collection

One of the main benefits of bankruptcy is that when a business files, whether Chapter 11, Chapter 7, or one of the more obscure chapters, the bankruptcy code generally calls for an automatic order staying (suspending) all debt collection activities by the business’ various creditors. The practical effect of this automatic stay is that, at least for a short period of time, the business does not have to pay certain debts during the bankruptcy case. Note that this suspension of debt collection does not apply to certain of the business’ ongoing payment obligations on secured debts on assets that a business is keeping through its bankruptcy case. Examples of these secured debts include mortgages on real property that the business intends to keep, and payments must continue to be paid during the bankruptcy. However, even the terms of these kinds of secured debts can be negotiated during bankruptcy, including the amount of past due payments, the amount of total principal due on the debt, and even the amount of payment made during bankruptcy. Payments made on these secured debts during bankruptcy is referred to as adequate protection payments. 

Renegotiation and Contractual Obligations

Most businesses have contractual obligations, such as a lease agreement related to commercial space, equipment finance agreements, and other ongoing agreements. In a Chapter 11 case, the business as a “debtor in possession” can engage in negotiations with its creditors related to these kinds of contracts. A business’ vendors, suppliers and other creditors may be willing to negotiate the terms of ongoing services, or reduce outstanding debts, in order to continue a working relationship with the business. When creditors have the right perspective on a business bankruptcy, then may realize that it’s more beneficial for the business to emerge from bankruptcy so that it can continue to utilize the creditor’s products and services for years to come. A business that is able to renegotiate its contracts and debts, and emerge from a Chapter 11 reorganization a much leaner and more efficient business, may have created for itself a competitive advantage over its competitors who are stuck with less favorable contract terms and outstanding debt.

insolvent liquidation process

Potential Reduction of Personal Liability on Business Debt

One of the benefits of bankruptcy through business liquidation and reorganization may be the reduction of certain debts that are jointly owned by both the business in bankruptcy and its owners. If a business simply languishes outside of bankruptcy, and without any formal process for liquidation or reorganization of its operations, it will likely end up with judgments, foreclosures, and repossession, all of which will cause the loss of the value of the business’ ongoing operations and its assets. In the end, this means less value distributed to creditors, and more debt left outstanding, including any debt that was personally guaranteed by the business’ owners. Alternatively, if a business is formally liquidated, its value is more quickly realized, and potentially more of its debt paid down. Further, if a business is formally reorganized in bankruptcy, and continues to operate as a streamlined operation, and can be more profitable, and may have an increased chance of paying down any debt that is personally guaranteed by the business’ owners. 

The Benefits of Bankruptcy with Middlebrooks Shapiro

Though it has received a bad reputation over the years, there are many benefits of bankruptcy. If you own a business and are becoming increasingly worried about legal or financial issues, it may be time to consider bankruptcy. The attorneys at Middlebrooks Shapiro specialize in all types of bankruptcy from Chapter 7 and Chapter 11 to Chapter 12, Chapter 13, and Subchapter V. Schedule a free, no obligation consultation with our team for experienced counsel and sound advice on how your business can best reap the benefits of bankruptcy.