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Bankruptcy protects businesses in crisis

| Oct 27, 2020 | Bankruptcy, Chapter 11 |

Boy Scouts of American (BSOA) has been rocked by controversy in recent years for the cover-ups regarding sexual abuse detailed in secret records going back to 1944. With the deadline for victims to file a claim approaching, the organization looks like it will surpass the Catholic Church with the number of claimants stepping forward. In efforts to protect itself, the BSOA followed the church and Pacific Gas & Electric’s (who filed in 2019) by filing bankruptcy protection in 2020.

Critics may complain that these companies are trying to avoid paying hundreds of billions to victims, but this is a legal strategy afforded by bankruptcy for the saving organizations from going out of business. The protections enable businesses of all sizes to reorganize under difficult conditions.

Suspension of debt

Under Chapter 11 protection, the business does not pay bills it accrues. It creates a business plan for reorganizing and paying creditors a percentage of the money owed. By keeping the companies afloat under Chapter 11, they have a better chance of delivering at least some of the money owed to their creditors. The creditors can also sit on a committee that enables them the approval of the business plan and the right to provide information to the judge overseeing the bankruptcy.

Contract renegotiation

The business in Chapter 11 can also enter into contract negotiations with its workers and unions, vendors and suppliers. If a new agreement cannot be reached, the business also can terminate the contracts. The possibility of work for years to come under a new contract often works in favor of the business, thus enabling it to become profitable.

Protecting businesses and owners

Some argue that debt forgiveness, time to restructure, and newly negotiated contracts can give businesses an unfair advantage over competitors. However, restructuring may not be enough. If there is still money going out as a business lies dormant or floundering, it may make sense for the owner to file Chapter 7 if they are personally liable for the debt. This enables owners to decrease their personal risk and financial obligation.

Start by consulting with a bankruptcy attorney

Those with questions about whether they could restructure their business under Chapter 11 protection may need to speak with a bankruptcy attorney practicing here in California. These legal professionals can advise owners, stakeholders and companies regarding the best approach for keeping the business going during these difficult economic times.