Downsides of Chapter 11 Bankruptcy
Chapter 11 bankruptcy, while offering a path for businesses to reorganize their debts and continue operating, has several significant downsides:
- Complexity and Cost: Chapter 11 is the most complex and expensive form of bankruptcy, involving extensive legal and professional fees that can be burdensome for struggling businesses. 138
- Loss of Privacy: Businesses must provide detailed financial information to the bankruptcy court, which becomes part of the public record, leading to a loss of privacy. 25
- Profitability Requirements: Debtors must demonstrate that they can operate profitably under a reorganization plan, which can be challenging for businesses with significant financial difficulties. 25
- Some Loss of Control: While debtors generally remain in control of their business operations, certain activities such as selling, purchasing, refinancing, or leasing major capital assets require court approval. 25
- Restrictions on Compensation: Compensation limits may be imposed on senior executives, company officers, and other key stakeholders. 25
- Long Timeline: Chapter 11 proceedings can be lengthy, often taking years to complete, which can be time-consuming and stressful for businesses. 368
- Unpredictable Outcome: The outcome of Chapter 11 bankruptcy can be unpredictable, with varying costs and timelines, and there is always a risk that the business may not emerge successfully from the process. 368
- Potential Loss of Shareholder Control: In some cases, the original shareholders of a corporation may lose their position completely, as seen in the case of General Motors. 2