When business revenue declines and creditors don’t receive payment, they may take aggressive actions to collect. Lawsuits are a common response to debtors falling behind on payment arrangements or defaulting entirely on a debt.
In some cases, creditors might ask the courts to initiate a receivership. Receivership involves having an outside party assume control over business operations. They conduct a thorough review of financial records to identify any major issues. They may restructure a company or liquidate resources in an effort to repay creditors. If outside organizations have threatened to pursue receivership or have filed paperwork with the courts, a Chapter 11 reorganization bankruptcy could protect a company accordingly.
Chapter 11 prevents the loss of control
In a receivership scenario, the parties currently operating the business effectively lose control of the company. The receiver assumes control of the struggling company, and the prior leaders have minimal say in what happens next. During a Chapter 11 bankruptcy, existing company leaders can take many of the same steps that a receiver might pursue while working to keep the company afloat.
They can restructure company operations, close redundant facilities and otherwise seek to streamline operations to make the company profitable again. Chapter 11 bankruptcy proceedings are complex and may take years to successfully complete. Still, pursuing bankruptcy and retaining control over the company may be preferable to allowing creditors to pursue receivership and risking permanent damage to the organization and its resources.
Discussing different forms of business bankruptcy with a skilled legal team can help executives and owners evaluate their options. A Chapter 11 bankruptcy filing can make a major difference for companies on the cusp of receivership or facing creditor lawsuits.