Bankruptcy / Chapter 11

Chapter 11 Bankruptcy: 4 Ways To Avoid It

Written by Ben Tejes
Updated Oct 11th, 2023

Every company goes through hard times. Keeping a business afloat is a difficult task even in the most hospitable of environments. Unfortunately, there’s no sure-fire way to keep a business competitive as each is different. There are, however, general strategies and principles that may be followed that’ll at least get you back on the right track.

Some of the things that’ll help each business stay afloat or even grow can be industry-specific. To supplement this article, it’ll probably be a good idea to consult an industry expert. Put them on board to help you come up with a strategy that’s custom-made for your business. 

For instance, if you’re a trucking business and in need of professional advice, there are consultancy companies like TAFS and others that specialize in helping businesses maximize their potential. The trick here is to go with a tried and tested consultant, no matter your industry. 

1) What is a Chapter 11 Bankruptcy Case?

Chapter 11 cases are large reorganizations. This chapter of bankruptcy is used by large corporations, such as J.C. Penney, Neiman Marcus, Toys “R” Us, PG&E, and Chrysler, to reorganize their debts so that they can continue operating instead of closing the doors and liquidating the business assets. However, as stated above, Chapter 11 bankruptcy cases can also benefit small businesses and individuals.

2) The Chapter 11 Plan of Reorganization 

The Chapter 11 plan is a detailed roadmap for how the company intends to reorganize its debts. When you complete the Chapter 11 process, the plan becomes a new binding contract between the debtor and its creditors. Because companies need the flexibility to restructure their debts, the Chapter 11 plan allows a debtor to perform a wide variety of actions. Some of the benefits of a Chapter 11 plan include:

a) Stops Litigation

The Chapter 11 case stops pending litigation and future litigation without bankruptcy court approval. Most disputes are resolved through the Chapter 11 plan, which is generally more beneficial to the Chapter 11 debtor. 

b) Recovery of Pre-Petition Transfers and Payments

The debtor may recover preferential payments or transfers made within a short time before the Chapter 11 case was filed. This step allows the debtor to reclaim money or property it may have transferred before deciding to file Chapter 11. The money and property can then be used to develop an effective reorganization.

c) Renegotiation or Reject Contracts and Leases

The ability to reject contracts and leases or renegotiate the terms can be a valuable benefit of Chapter 11. The company can renegotiate the terms of the contract or lease so that it becomes affordable for the company to continue the relationship. If the contract or lease is burdensome, the company can reject it in the Chapter 11 plan.

d) Employment Matters

The Chapter 11 plan allows the debtor to negotiate or reject employment and labor contracts. It also allows the debt to change pension plans and other obligations. This step can also be important to ensure that the company can meet its other obligations to continue operating. While there are many benefits of filing Chapter 11, there are also some matters that you should carefully consider. Things to consider before filing Chapter 11 include, but are not limited to:

  • The cost and time involved in filing and completing a Chapter 11 case.
  • Immediate cash flow problems. Debtors generally need to file motions to use cash if their accounts or receivables are used as collateral for loans.
  • Most Chapter 11 debtors remain in control of their business, but there could be some loss of business control depending on the circumstances of the case.
  • Business decisions may be limited. Chapter 11 debtors are generally not permitted to take risks or make decisions that are out of the ordinary course of business. 
  • Rejecting contracts can result in damage claims, which must be handled through the Chapter 11 plan.
  • Guarantors may face collection actions for debts that are personally guaranteed.
  • Creditors may request that the court appoint various committees to represent groups of creditors. These committees can have a significant influence on the terms of a plan. A certain percentage of creditors must approve the Chapter 11 plan. Also, creditors can file competing Chapter 11 plans in some cases.
Before filing Chapter 11, make sure that you understand the potential risks and benefits. Once you file a Chapter 11 case, it can be difficult to undo the chain of events that are set in motion by the filing of the bankruptcy case.

Avoiding Chapter 11 Bankruptcy

That said, here are some ways that’ll keep your business from going under:

1. Assess The Situation

The first thing to be determined when you notice your business is in trouble is to assess the exact nature of the problem you’re facing. Try to identify the source of the problem by pinpointing the areas that seem to be causing your business to fail. This will then determine the strategies you need to implement in order to save your business. 

You need to be willing to ask yourself the hard questions such as:

  • Are you being pressured by external forces? 
  • Are your competitors undercutting you? 
  • Is the new government legislation proving harmful to your business? 
  • Is your product or service in need of a facelift?

A good way of assessing your business is by engaging your customers. At the end of the day, whether they’re satisfied with your product will determine the survival of your business. Depending on the nature of your business, you can collect feedback from them to see what they’re pleased with and what changes you can implement that won’t only ensure the survival of the business but potentially increase your market share.

Another idea would be to consult your employees. They’re a brilliant source of information as they’re the ones who sell your product and engage with your customers. They may have insightful information to offer in improving the product or increasing customer service.

2. Create Long-Term Solutions

Don’t fall into the trap of applying short-term fixes to the problems the business is facing. Whether it be by offering discounts for limited periods or trying to rouse the morale of your employees through incentives, these methods might work for a season but do nothing to help the overall position of the business. Find long-term solutions that’ll provide your company with sustainable change and keep your business afloat for years to come.

3. Manage Your Finances

The failure to manage a cash flow is one of the most prevalent causes of a business's demise. In order to identify where you’re weak in this area, it’d be a good idea to start developing weekly budgets and cash flow estimates rather than monthly or bi-annual ones. Before things get out of hand, you might want to call your creditors to explain the issue and possibly work out a payment plan that works for everyone. The majority of creditors are sympathetic, and acting in this manner is a positive sign of faith.

There are services offered online by different businesses that help you assess the level of your debt as well as help you determine priority payments. For example, you prioritize obligations that’d cause the business to sink if you don't pay them. Things like paying your employees would be at the top of the list. Next would be the supplier of materials needed to produce your product, and so forth.

You have to start cutting back on your spending right away. It might be as significant as staff reductions or as little as cutting the price of a product without skimping on quality. Some businesses, if they don't forthrightly change their office location to a different and cheaper area, downsize on their current space. Look into automating repetitive tasks in the workplace. There are various applications and widgets available that can be used without human supervision. This frees up the staff to work on more crucial tasks, increasing efficiency and saving both time and money.

The process of ‘trimming the fat' may be painful in the short term, but it’ll help the business in the long run. Always focus on the bigger picture, but be wise in doing the little things.

4. Have Quality Marketing

There’s the age-old saying ‘if a tree falls in the forest and nobody’s there, would it still make a noise?’ You can have everything correct in your business such as the perfect product, a pre-determined target market, and competitive pricing, among others, but if no one sees the product, you have nothing. This is where marketing strategies come into play.

Look into bolstering your market strategy. Increase your presence in the market and let the consumers know you exist. Sometimes, you might need to invest in a complete revamp to increase your visibility. Figure out the strengths of your product as opposed to your competitors and highlight these differences. Show the customers why you’re one of a kind. 

A business must also take into account that a quality marketing strategy includes extensive market research to assess market changes and ensure your product stays ahead of the curve of new market trends and policies. Constantly making sure that the product is competitive and addressing the issues it’s meant to solve in the most efficient manner possible should be highlighted.


The customer is king. In all the planning and strategizing, if you keep this important fact in mind, you’ll succeed in keeping your business afloat. As the primary force that’ll drive money into your business, their happiness indirectly translates to profit for the business. Consider the ideas mentioned here as you strategize for ways to keep your business striving and thriving.