Business Bankruptcy vs. Business Restructuring: Which Option Is Right for You?

When your business faces financial challenges, the path forward may seem unclear. Should you consider formal bankruptcy protection, or would a restructuring outside of bankruptcy better serve your company’s needs? Understanding the differences between these approaches can help you make an informed decision that protects your business and stakeholders.

At Biggs Law Firm, we’ve guided numerous North Carolina business owners through both bankruptcy and restructuring processes. While each situation is unique, understanding the fundamental differences between these options can help you determine which path might work best for your company’s specific circumstances.

Understanding Business Restructuring

Business restructuring typically refers to reorganizing a company’s operations, finances, or legal structure without filing for bankruptcy protection. This approach allows businesses to address financial difficulties while avoiding the public nature of bankruptcy proceedings.

Restructuring can take many forms. Some companies negotiate directly with creditors to modify payment terms, reduce debt amounts, or extend payment schedules. Others might restructure their operations by selling non-essential assets, consolidating locations, or reducing workforce to improve cash flow. Additionally, businesses might restructure their legal organization, perhaps converting from one business entity type to another or reorganizing ownership structures.

The primary advantage of restructuring outside of bankruptcy is the more flexible nature of the process.  You can work directly with creditors and stakeholders to develop solutions that work for everyone involved. This approach also avoids the public disclosure requirements of bankruptcy, which can be important for businesses concerned about customer or vendor relationships.

However, restructuring outside of bankruptcy has limitations. You cannot force unwilling creditors to accept new terms, and you lack the legal protections that bankruptcy provides. If even one major creditor refuses to cooperate, the entire restructuring effort could fail. In addition, restructuring outside of bankruptcy means there is no hold on pending litigation, foreclosures, or repossessions absent agreement. 

Chapter 11 Bankruptcy Protection

Chapter 11 bankruptcy provides a structured legal framework for business reorganization. When you file for Chapter 11, the automatic stay immediately stops collection efforts, lawsuits, foreclosures, or repossessions, giving your business breathing room to develop a reorganization plan. This protection extends to ongoing operations, allowing you to continue serving customers and maintaining vendor relationships while addressing financial challenges.

Under Chapter 11, you propose a plan of reorganization that outlines how you’ll address debts and restructure operations. The plan must be confirmed by the bankruptcy court. Creditors may oppose your plan, but the bankruptcy court can override these objections. Once confirmed, the plan becomes binding on all parties, including creditors who voted against it or did not otherwise participate in the bankruptcy case

Chapter 11 offers several advantages that restructuring outside of bankruptcy cannot provide. The automatic stay protects against collection actions and foreclosures. You can reject unfavorable contracts and leases, potentially reducing ongoing obligations. Assets can be sold or surrendered for less than the amount owed on them. The process also allows you to “cram down” a plan on dissenting creditors if certain legal requirements are met.

The bankruptcy process does have drawbacks. It requires court approval for many business decisions, involves public disclosure of financial information, and can be more expensive due to court costs and additional legal requirements. Some customers or vendors may also react negatively to a bankruptcy filing. 

Key Factors in Your Decision

Several factors should influence your choice between restructuring and bankruptcy protection. The number and cooperation level of your creditors plays a crucial role. If you have relatively few creditors who are willing to work with you, restructuring outside of bankruptcy might be feasible. However, if you have many creditors or some who refuse to negotiate, Chapter 11’s ability to bind all creditors to an approved plan becomes valuable.

Your cash flow situation is another important consideration. If your business has sufficient cash flow to continue operations while negotiating with creditors, restructuring might work. If you’re facing immediate threats like foreclosure or equipment repossession, the automatic stay provided by Chapter 11 might be necessary. In addition, Chapter 11 puts a hold on payments to existing unsecured or trade creditors until your plan of reorganization is approved, giving your business a chance to address its cash flow problems. 

The nature of your business relationships also matters. Some businesses find that customers and vendors are understanding about financial difficulties and continue relationships through restructuring. Others discover that bankruptcy filing, despite being public, actually reassures stakeholders that the company is taking definitive action to address problems.

Consider whether you need to reject contracts or leases as part of your restructuring. If you’re bound by unfavorable agreements that are contributing to your financial problems, Chapter 11’s contract rejection provisions might be essential. Outside of bankruptcy, you must either honor these agreements or negotiate releases with the other parties.

The Role of Professional Guidance

Both restructuring and bankruptcy involve complex legal and financial considerations. The choice between them often depends on factors that may not be immediately apparent. A thorough analysis of your financial situation, creditor relationships, and business operations is essential for making the right decision.

Working with the team at Biggs Law Firm can help you evaluate your options objectively. Our experience with both bankruptcy and restructuring can help you understand the implications of each approach for your specific situation. We can also help you identify potential obstacles early in the process and develop strategies to address them

Moving Forward with Confidence

Whether you choose restructuring or Chapter 11 bankruptcy, the key is taking action before your financial situation becomes unmanageable. Both options can provide pathways to financial stability, but they work best when implemented before crisis points are reached.

Many business owners wait too long to explore their options, limiting their choices and reducing the likelihood of successful outcomes. By understanding the differences between restructuring and bankruptcy early, you can make proactive decisions that serve your business’s long-term interests.

Remember that neither option represents failure. Both are legitimate business tools designed to help companies address financial challenges and emerge stronger. Many successful businesses have used these processes to adapt to changing market conditions, economic downturns, or unexpected challenges.

Getting the Support You Need

If your business is facing financial difficulties, don’t navigate these complex decisions alone. The choice between restructuring and bankruptcy protection has significant implications for your company’s future, and professional guidance can help ensure you make the best decision for your circumstances.

At Biggs Law Firm, we understand that every business situation is unique. We take time to understand your specific challenges, goals, and concerns before recommending a course of action. Our hands-on approach means we work closely with you throughout the process, whether that involves negotiating with creditors outside of bankruptcy or guiding you through Chapter 11 proceedings.

If you’re considering your options for addressing business financial challenges, we invite you to schedule a consultation with our experienced legal team. We’ll listen to your situation, explain your options in clear language, and help you determine the best path forward for your business. 

Contact us today at (919) 375-8040 to take the first step toward bringing order out of chaos and securing your business’s future.