Debunked: Myths about Chapter 11 bankruptcy

Many New Mexico business owners pour their hopes, work and finances into their business. Running their business is not only a job but often a dream that they have had for a long time.

Therefore, it is natural to worry when the business comes up against debt and financial challenges. Business owners have several options to handle their debt, including Chapter 11 bankruptcy. However, many business owners avoid bankruptcy because of the common myths surrounding this debt relief option.

Business owners must be aware of these myths – and the truth about Chapter 11 bankruptcy.

Myth #1: Filing Chapter 11 means going out of business

This is the most common worry business owners have when they struggle with finances. However, Chapter 11 bankruptcy is also called a reorganization bankruptcy. The purpose of this bankruptcy is to allow businesses to stay open and continue to operate, even as they:

  • Restructure their debts
  • Create a plan to repay debts
  • Restructure the business, if necessary

Chapter 11 does not work for all businesses. Some businesses have had to change their bankruptcy filing to Chapter 7, and, in turn, had to close their doors. The type of bankruptcy businesses file depends heavily on their specific circumstances. Even so, filing Chapter 11 does not mean the end of your business.

Myth #2: My business’s reputation will be ruined

In the business world, reputation goes a long way. Many business owners worry that filing bankruptcy will jeopardize their reputation and standing with other businesses as well as their consumers.

This is not true. Several successful businesses have filed Chapter 11 bankruptcy in the past, including:

  • Marvel Studios
  • Converse
  • Delta Airlines

The structure of these businesses might look different now. For example, Nike bought Converse, and Disney now owns Marvel Studios. Even so, these companies are thriving in the business world – and with their consumers – after achieving debt relief.

Myth #3: My business is too small for Chapter 11 relief

Many people think Chapter 11 business bankruptcy is only an option for big companies – such as the three listed above. That is not true, especially since federal lawmakers recently made Chapter 11 bankruptcy more accessible for small business owners.

The Small Business Reorganization Act and the Coronavirus Aid, Relief and Economic Security Act adjusted the debt thresholds and amounts that qualify a business to file Chapter 11 bankruptcy. Therefore, small business owners can also seek the debt relief they need, while keeping their doors open and protecting their future.

To determine if Chapter 11 bankruptcy is a feasible option for your business, it is wise to consult with an experienced bankruptcy attorney.