Debunking 4 Business Bankruptcy Myths

While there are plenty of articles on the web that dispel consumer (i.e. personal) bankruptcy myths, there are few if any that focus on the misunderstandings and misinformation that surrounds business bankruptcies.

To remedy this critical knowledge gap, here is the truth about 4 enduring business bankruptcy myths:

Myth #1: Filing for business bankruptcy spells the end for your business.

Fact: If you file for chapter 11 bankruptcy, you’ll be able to keep your business operational while you restructure and repay your debts. Many large companies like General Motors have successfully emerged from chapter 11 bankruptcy.

Myth #2: Filing for business bankruptcy means that you will lose all of your business assets.

Fact: Some of your business assets — such as those that are required to generate income and profit — are likely to be protected from liquidation (i.e. sold by the court-appointed trustee with the proceeds being distributed to creditors).

Myth #3: Bankruptcy court is pro-creditor and anti-debtor.

Fact: Overly-aggressive creditors (which unfortunately describes most of them) repeatedly tell debtors that the court won’t be sympathetic to their plight. On the contrary, they say, the court will be hostile and punitive. This simply isn’t true, and never has been.

The court is not for or against creditors or debtors. The court is interested in two things: correctly applying prevailing law, and ensuring that the bankruptcy process is properly structured and documented.

Myth #4: Filing for business bankruptcy will lead to an exodus of customers, employees, suppliers and vendors. 

Fact: As noted above, the purpose of chapter 11 bankruptcy is to give businesses a realistic opportunity to restructure their debts while they keep their business operational. If it was true that customers, employees, suppliers and vendors raced for the exits the moment they learned about a bankruptcy filing, then it wouldn’t matter if a business remained open: it would be doomed.

Fortunately, this isn’t true. Filing for bankruptcy does not indicate that a business has done anything deliberately wrong, and it certainly has nothing to do with criminal activity. Essentially, it is an administrative protection and process.

With this being said, businesses that file for chapter 11 bankruptcy will typically need to get the trustee’s permission to make investments, procure equipment, and so on. This is simply to ensure that the purchase is in alignment with the debt restructure plan.

The Bottom Line

Filing for business bankruptcy is a serious decision, and shouldn’t be done without consulting an experienced bankruptcy attorney. To give your business the best chance of long-term success, remember that bankruptcy-related facts are your friends — and myths are your enemies!

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