Debunking 3 Persistent Chapter 11 Bankruptcy Myths

Chapter 11 bankruptcy is most often used to reorganize a business, corporation or partnership, so that it can continue operating while paying back debt at realistic and reasonable rate. However, despite the fact that this option has been around for decades, there continue to be several persistent myths that confuse, frustrate and indeed, financially damage would-be filers who make the wrong decisions at the wrong time.

While it’s beyond the scope of this or any other article to pull back the curtain and explore all of the chapter 11 details (and there are many of them — chapter 11 is by far the most complex of all bankruptcy chapters), I can debunk three lingering misunderstandings so that they’re neither pitfalls nor obstacles on your path.

Myth: Filing for chapter 11 bankruptcy will essentially destroy your credit rating until you’re ready to retire.

Fact: Some people put off filing for chapter 11 bankruptcy for months or years because they’re afraid of severely damaging their credit score until, well, forever. Here’s the thing: if chapter 11 is on the horizon, any notion of preserving your good credit at this time should be tossed out the window. Instead, your focus should be on leveraging the legal protections afforded by chapter 11 to keep your business afloat, and give it a fighting chance to survive and thrive in the future.

Myth: The courts are pro-creditor and anti-debtor.

Fact: The courts are neither pro-creditor nor anti-debtor. According to bankruptcy attorney Charles H. Huber, who has more than 30 years of experience helping businesses and individuals safely navigate bankruptcy filings (for more information visit www.charleshuberlaw.com), the courts are interested in one thing, and one thing only: structure. Debtors who have a robust and realistic restructuring plan, which meets all legislative requirements without exception (and there are plenty of them), put themselves in the best possible position to get through the filing process as painlessly and inexpensively as possible.

Myth: Businesses that avoid filing for bankruptcy can go to jail for unpaid debts.

Fact: This threat is an old standard for some creditors — especially those targeting individuals (i.e. chapter 7 filers). Thankfully, this is firmly in the myth bucket. Yes, centuries ago people could end up in “debtor’s prison.” But enlightenment has come to bankruptcy law, and regardless of how difficult (read: horrifying) a debt situation becomes, incarceration is not in the cards. However, with this being said, individuals can be held criminally responsible if it’s proven that they broke the law by, for example, falsifying documents, stealing from suppliers, committing fraud, and so on.

The Bottom Line

Contemplating a chapter 11 bankruptcy filing is as serious as it gets — because the future of your business and, indeed, your livelihood is on the line. This means that facts are your friends, and myths are your enemies. Rely on the above and get specific advice from an experience bankruptcy attorney to make your financial road ahead as safe and straightforward as possible.