You Need a Lot of Money to Go Broke: The Rising Cost of Chapter 11
Chapter 11 was created to give distressed businesses room to reorganize. The automatic stay could stop collection activity, management could remain in control, and a company could address its liabilities while continuing to operate.
That remains the theory.
In practice, Chapter 11 has become a process that many otherwise viable companies cannot afford.
“You’ve got to have a lot of money to go broke,” restructuring attorney John Melko tells Reviving Giants host Drew McManigle.
It’s a blunt line, but it captures one of the central problems facing modern restructurings: the legal remedy designed to preserve enterprise value can consume an extraordinary amount of it.
Chapter 11 Is Litigation
When a prospective client asks what Chapter 11 can do, Melko begins with what it will cost.
“This is a very expensive process,” he says. “You have to think of a Chapter 11 filing like a lawsuit. Things can happen during litigation that are unanticipated.”
The debtor pays its own lawyers and financial advisors. It may also be required to pay the professionals retained by a creditors’ committee and secured lenders. Investment bankers, claims agents, valuation experts, and specialists may join the case.
In a large proceeding, each constituency can have its own legal and financial team.
Those professionals may be necessary. A major case can involve tax, securities, regulatory, and financing issues simultaneously. But the cumulative expense can quickly become a restructuring problem of its own.
McManigle cites a study of large cases in which blended professional billing rates reportedly approached $1,700 per hour. In another matter, he saw more than 50 lawyers and other professionals bill time to a single case.
The issue is not merely what one professional charges. It is the number of people billing, the duration of the case, and the limited oversight available once fee applications become hundreds of pages long.
Cost Changes Who Can Be Saved
Melko acknowledges that his firm’s economics have forced him to turn away smaller companies that might otherwise have been good Chapter 11 candidates.
“I’ve had to turn a number of small businesses away — or refer them elsewhere — that I thought would have been good candidates for Chapter 11,” he says. He understood their problem and what they should do, but they couldn’t afford his services. “I don’t like wasting people’s time.”
That should concern business owners, lenders, and restructuring professionals.
A company may have a viable product, a loyal customer base ,and a legitimate path forward. But if the cost of accessing the system exceed sits available liquidity, the theoretical benefits of Chapter 11 do not matter.
The business is effectively priced out of the remedy.
Melko's comments point to a particular risk in the middle market, where companies are often too complex for a simple winddown but too small to absorb the professional infrastructure of a major case.
Preparation Is the Best Available Cost Control
The most practical way to control Chapter 11 expenses is to reduce the amount of uncertainty that enters the courtroom.
"The more that [companies] have negotiated or arranged outside of bankruptcy, the shorter the process will probably be — and the better off they're going to be,"Melko says.
That preparation also means being honest about the outcome being pursued. Melko and McManigle both point to a recurring failure pattern in Chapter 11 cases: companies that fix their balance sheet but never fix the underlying business, only to end up back in bankruptcy again — a pattern common enough in the industry to have its own name, the "Chapter 22."
Distinguishing a genuine reorganization from a balance sheet-only fix, before the case is filed, is part of what preparation means.
A rushed filing transfers unfinished decisions into an expensive public process. A prepared filing does not eliminate risk. But it can reduce the number of issues that must be litigated while the professional meter is running.
Bankruptcy Should Solve a Specific Problem
Before recommending a filing, Melko asks a more important question: What problem does the company need the Bankruptcy Code to solve?
Sometimes the answer is straightforward. The automatic stay — the injunction that halts creditor action the moment a case is filed — can be the entire point. Melko notes that companies facing an imminent adverse judgment will sometimes file Chapter 11 for that reason alone, even when they're otherwise financially sound.
Other times, the more useful question comes first: does this business have a reason to exist in its market at all? McManigle describes asking that question internally before taking on a new case, since the answer changes whether the engagement should be a reorganization or a liquidation.
But Chapter 11 should not be treated as a general response to poor performance. When management cannot clearly identify the relief it needs, the filing itself can become the strategy — and that is rarely enough.
The first restructuring decision is not how to file. It is whether filing will preserve more value than it consumes.
Takeaways For Leaders
· Treat Chapter 11 as expensive litigation, not administrative paperwork.
· Identify the specific relief the company needs before recommending a filing.
· Resolve as many issues as possible before entering court.
· Build professional-fee requirements into liquidity planning.
· Do not assume a viable business can automatically afford the restructuring process.
Listen to the Full Episode
Reviving Giants is presented by MACCO Group and hosted by Drew McManigle. To hear Drew’s full conversation with John Melko about the evolution, cost, and future of Chapter 11, listen on the Reviving Giants podcast page or wherever you get podcasts.
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TL;DR
Chapter 11 can preserve a viable company, but its cost may also consume the value it is intended to protect. Companies improve their odds by entering the process with a defined objective, credible liquidity plan, and as many stakeholder agreements as possible already in place.
