Economic downturns in 2024 are causing people to spend less money, significantly impacting businesses. Although the COVID-19 pandemic has ended, its aftermath has led to sudden and substantial declines in business activity.
Many companies need help to recover as consumers remain cautious with their spending, further exacerbating their economic challenges. As a result, many corporations may consider Chapter 11 bankruptcy to reorganize and manage their debts while continuing operations.
Common reasons why businesses go bankrupt
Several common issues can push different industries towards Chapter 11 bankruptcy. In the restaurant industry, for example, at least 16 major chains, including Red Lobster, Bucca di Beppo, and Kuma’s Corner, have filed for bankruptcy in 2024 due to financial struggles.
In addition to reduced consumer spending, high overhead costs such as rent, utilities, and payroll can quickly accumulate. Such factors can make it challenging to keep up with expenses.
Mismanagement, lawsuits, fierce competition, evolving consumer habits and the need to adapt to market changes or new technology can also lead to ongoing financial losses. Excessive debt can become unmanageable, especially during periods of slow business.
Criteria for filing Chapter 11 bankruptcy
A business must meet a few basic requirements to file for Chapter 11. First, almost any business—a large corporation or a partnership—can file. Sometimes, even individual business owners can file if they have enough debt.
The company must be struggling financially, meaning it cannot pay its bills on time. The owners seek legal advice to create a solid plan to reorganize their business and get back on track. This plan should explain how they will handle their debts and run their business better.
When a bankruptcy petition is filed, the owner can keep running the business but becomes the debtor in possession. The court assigns a U.S. Trustee to supervise the process. In addition, the owner needs court approval to take out new loans, sell assets, or close the business. They must also file a detailed plan and statement with the court, which creditors can vote on.
Understanding these criteria and reasons can help business owners decide if Chapter 11 bankruptcy suits them. It offers a way to reorganize and hopefully turn the business around, but it does require a clear plan and commitment to overcome the present financial issues.
