How Does Filing for Bankruptcy Benefit Failing Businesses?

Experiencing financial difficulties is a frequent hurdle that companies encounter, regardless of their size. In cases where a company is incapable of fulfilling its financial responsibilities, filing for bankruptcy could be a feasible solution. Although bankruptcy may have unfavorable implications, it can serve as a chance for struggling businesses to reconstruct, rearrange, and recover their financial footing.

1. Protection from Creditors and Legal Proceedings

Filing for bankruptcy enables a failing business with an automatic stay, halting all collection efforts by creditors and legal proceedings against the business. It gives the company valuable time to evaluate its financial condition, create a restructuring plan, and negotiate with creditors for a feasible solution. By granting a reprieve from creditor pressure, bankruptcy enables businesses to focus on resolving their fiscal difficulties.

Recently Go First, an Indian low-cost airline, faced significant difficulties by fierce competition and rising fuel costs. In 2020, the company filed for bankruptcy under the Insolvency and Bankruptcy Code, triggering the automatic stay. It allowed Go First to temporarily suspend creditor claims and explore potential options for financial restructuring.

2. Debt Repayment and Restructuring

Bankruptcy provides failing businesses or enterprises a second chance to address their outstanding debts and restructure their financial obligations. Chapter 11 bankruptcy, commonly used by businesses, allows for the reorganization of debts while enabling the business to follow its operations. It offers an opportunity to resolve the issues with the creditors, establish new repayment terms, and potentially reduce the debt burden.

Like the American retail giant, Toys "R" Us, filed for Chapter 11 bankruptcy in 2017 due to mounting debt and increased competition from e-commerce. During the bankruptcy process, Toys "R" Us was able to resolve the debt with its creditors, close unprofitable stores, and revamp its operations. Eventually, the business emerged from bankruptcy with a new business plan, reduced debt, and a renewed emphasis on its main strengths. 

3. Asset Preservation and Liquidation

Bankruptcy also provides failing businesses to preserve their assets and potentially liquidate them in a controlled manner. Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of a company's assets to repay its debts. While this might result in the business having its operations, it can provide a way to repay creditors and maximize the amount of the remaining assets. 

The iconic photography company, Eastman Kodak in the year 2012, faced declining film sales and increased competition from digital photography. Kodak filed for Chapter 11 bankruptcy. The company underwent a significant transformation, selling off non-core assets and focusing on its profitable business segments. By leveraging the bankruptcy process, Later, Kodak emerged as a restructured company with reduced debt and a stronger market position. 

4. Fresh Start and Rebuilding

Bankruptcy offers failing companies a fresh start and an opportunity to rebuild their businesses. By shedding excessive debt, streamlining operations, and restructuring their financial structure, companies can set a new foundation for future success. 

Automobile manufacturer General Motors (GM) filed for Chapter 11 bankruptcy in 2009 amidst a severe financial crisis. In addition to restructuring its business and engaging in negotiations, GM reduced its debt load. The business emerged from bankruptcy with a leaner organization, increased effectiveness, and a renewed commitment to creating competitive vehicles.

Filing for bankruptcy may be an option for failing companies, but it can offer several benefits in terms of protection from creditors, debt repayment and restructuring, asset preservation, and a fresh start to rebuild their business.

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