The Covid-19 caused the deaths of more than five million people worldwide. It also brought the global economy to its knees. One industry suffered more than other businesses. That is the hospitality sector.

The pandemic forced many people in the hospitality industry to face the possibility of bankruptcy and insolvency. It was the first time since the Great Recession that they had to do so. Chapter 11 presents several issues for hotels and other hospitality sectors.

If you are in the hospitality sector and facing a seemingly insurmountable problem, you should take your time to carefully read this article. It will help you sort your troubles by guiding you through Chapter 11 guidelines. 

What Is Chapter 11?

You might already be thinking of availing of invoicing factoring. But before doing so, you should at least understand the trouble that you are in. Or perhaps, you ought to know more about Chapter 11. Doing this may help you decide if this type of factoring is the loan suitable for your company.

Chapter 11 allows a business to restructure its liabilities to remain as a going concern upon emergence from bankruptcy. Unlike the rules set in Chapter 7, where an entity’s assets are sold to pay off creditors according to statutory order, you can file for Chapter 11 voluntarily. 

What Does It Do?

Availing of working capital loans may not be enough to fix your problems. By filing for Chapter 11 (before proceeding to get any loan), your business can automatically stay open. Bankruptcy Code Section 362(a) triggers an immediate stay upon the debtor’s commencement of the bankruptcy case. 

This automatic stay prohibits all creditors, including secured lenders, from continuing any foreclosure or other proceedings. It also halts any existing pre-existing bankruptcy litigation pending against the hotel debtor, such as personal injury or employee lawsuits. 

You may still need to avail of working capital loans for your hotel to operate, but you do not have to worry about your liabilities (in the meantime). Take note that creditors and litigation parties may request relief from the automatic stay from the Bankruptcy court. But the stay gives a critical “breathing space” for the debtor to formulate a plan for the business to ultimately exit bankruptcy.

What Should I Do after Filing for Chapter 11?

Now that you have the financial “breathing space,” you must plan what to do next. At this point, the debtor must have enough cash to operate as a going concern. Sadly, the pandemic impacted the hotel borrowers’ liquidity like never before. Generally, secured lenders will hold an interest in a hotel debtor’s bank accounts and the cash generated through its operations.

The hotel debtor can only use this “cash collateral” with the secured lenders’ consent or pursuant to a Bankruptcy Court order. On top of that, debtors require liquidity beyond normal operating revenues to meet the increased cost associated with Chapter 11.

Conclusion

Filing for Chapter 11 will save your company from failure. But before you do so, you should understand how it will impact your business. 

After filing Chapter 11, you might want to take out working capital loans from Porter Capital. This financial leverage will help you continue operation, so call us now for more information!