Bad business decisions can lead to the accumulation of debt. A series of poor decisions by the management of a company or corporation eventually results in the need to reduce indebtedness or collapse. Putting the company assets up for sale may be out of the question. Filing for Chapter 11 or Chapter 13 bankruptcy protection may be the only way forward. Both chapters allow a business to restructure long-term debts and, hopefully, emerge from bankruptcy stronger. Filing for bankruptcy is bad news for stockholders, who usually receive pennies on the dollar for every dollar they had invested in the company.

Filing for bankruptcy is simple enough. All the business must do is prepare the appropriate papers, preferably with the help of an experienced and reputable law firm, and file them with the bankruptcy court in their jurisdiction. Businesses prefer Chapter 11 because it allows them to remain in control of the business and the bankruptcy process itself. A “Chapter 11 business” hopes to reorganize into a more profitable form and return to doing business after emerging from bankruptcy in the future.

Several methods exist for gaining debt relief. The objectives are to reduce indebtedness and decrease operating costs while maintaining the same level of revenue. This is tricky and is made more complicated by the expenses that accompany Chapter 11. A common method is to issue additional equity to new shareholders in order to gain more capital from the financial markets. The price of the company’s existing shares will usually fall, but the stated intent to reorganize may attract attention from big names and firms. A recent example is Warren Buffett’s $5 billion dollar investment in Bank of America, whose share price declined precipitously in the past month.

An alternative is to offer an exchange of creditor debt for creditor equity. The creditors agree to forego the debt in exchange for receiving shares of stock in the company. This represents yet another risk to the business. If the creditors receive too much equity, they can take over the company and fire existing management. As for decreasing operating costs, the business can change healthcare and benefit providers. Aside from their debt burden, employee benefits represent enormous costs to the company undergoing bankruptcy. Changing suppliers, raising prices and selling off subsidiary entities may be necessary. To avoid losing the company completely, drastic steps are sometimes necessary, even when going through Chapter 11.

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