How Companies Can Strategically Use Bankruptcy to Stay in Business

Chapter 11 bankruptcy should be the last resort option for a business in a financial crisis, but it can be used strategically to help companies recover and come out in a better financial state on the other side.

The pandemic has introduced new economic challenges to businesses that already faced pressure.

Holding companies, like the one that owns Men’s Wearhouse and Jos. A Bank are considering filing for Chapter 11 bankruptcy to restructure – and that may not necessarily be a bad thing.

How Bankruptcy Could Help a Business

Chapter 11 bankruptcy can be used to prevent the total loss of a business. This would allow potential buyers to purchase assets, reorganize, or merge with another company to reduce overall debt, increase liquidity, and improve profitability. The other side of this is a more streamlined, effective operating model that could keep companies solvent and, more importantly, people employed.

The linked Houston Public Media story illustrates the example of Marvel Comics, which declared Chapter 11 bankruptcy in 1996, followed by a decade in flux. However, the reorganization ultimately allowed Marvel to finance and create the 2008 “Iron Man” film, which was a major success and led to Disney buying the company in 2009.

More Practical Ways Chapter 11 Can Help

Many Chapter 11 plans provide payments to secured creditors, while the company will likely only pay back a percentage of what it owes unsecured creditors. This can clear balance sheets, satisfy creditors, and start anew if the business meets specific requirements.

If a business has several contracts (with vendors, labor unions, suppliers, or otherwise), a bankruptcy proceeding can allow for renegotiation of those types of agreements in the long-term solvency interest of the business.

A Chapter 11 bankruptcy may create longer-term competitive advantages if the balance sheets can be wiped clean over a predetermined period of time, particularly if equity security holders provide substantial and essential “new value” to satisfy the absolute priority rule.

While bankruptcy should be taken extremely seriously and is the last-resort option for a business of any size in a major financial crisis, it can be used strategically to recover from significant or unforeseen situations. The team at Natural State Law, PLLC can help determine if your Arkansas business is an appropriate candidate for Chapter 11 and help assess your options from there. Call us today at (501) 916-2878 to learn more and schedule a free consultation.