To understand how bankruptcy can cause a crisis, first separate the legal from the public relations aspects. Lawyers experienced in filing Chapter 7, Chapter 11 and Subchapter 5 of Chapter 11 (just for small businesses) file papers with the court. The process is well-established.

The company seeking bankruptcy protection faces many reputational and business challenges, the biggest of which is a loss of confidence from the stakeholders. These include:

• Customers or clients who may no longer feel comfortable purchasing the company’s goods and services.
• Vendors that are inclined or refuse to provide goods and services without prepayment.
• Employees who fear loss of their jobs.
• Investors because they may be last in line to recoup their money.
• Lenders, including banks and bondholders, whose loans are at risk.
• Business partners and other allies that have invested their good names, time and money.
• Regulators and other government agencies tasked with protecting the public.
• Landlords concerned their leases will be voided.
• Communities whose economic stability depends on the company’s employment and charitable support.

When BoardroomPR represents clients, its experienced crisis communication executives recommend a proactive and transparent plan. Rumors about insolvency can be as damaging to a company’s reputation and ability to continue to operate as a court filing. Once stakeholders lose confidence in a business, it is difficult and sometimes impossible to restore it.

Minimizing Reputation Damage Caused by Bankruptcy

How does a company minimize the inevitable hit its reputation will take when it files for bankruptcy? The business enters the legal process with a crisis communication plan for its stakeholders, just as it has a bankruptcy plan for its creditors. These four principles guide all public relations strategies:

• Be honest. The facts will be in court filings and reports from the bankruptcy trustee, so efforts to hide the truth are destined to fail. Bad news should be shared for what it is, not dressed up as something more positive.
• Be transparent. Ensure everyone has access to the same information whether creditors, customers, employees or other stakeholders. Doing otherwise creates suspicions that the company is playing favorites that are difficult to erase.
• Communicate regularly. In the absence of public announcements, rumors emerge and spread. The crisis can worsen, especially on social media where actors that can benefit from the company’s financial weakness or demise have incentives to spread inaccuracies and even lies.
• Collaborate with legal teams. Ensure that all communications comply with legal requirements and coordinate closely with legal advisors.
• Be consistent. Revising the history of the company’s financial troubles, for example, undermines the credibility of what was said before and what will be communicated later. The crisis communication team should know what the company plans before it acts so that the news comes from the company, not what people discover in court documents or stakeholders learn from the news media.

Crisis Communication During Bankruptcy

Communication of the bankruptcy is a public relations campaign that preserves the company’s reputation over a series of anticipated and unexpected events. The PR efforts parallel the legal ones.

The plan should anticipate that news will leak out that the corporation has hired financial and legal advisers specializing in bankruptcy. At that point, executives should have the communication plan in hand, so that they can announce the filing just as legal papers are submitted to the courthouse.

Why? Because it is more important to inform stakeholders directly than communicate through news media. Customers, employees, vendors, and others will place higher trust in the company if they receive information than if they read the news online or watch it on the TV.

Here are some of the best practices that BoardroomPR recommends to its clients:

• Tell your side of the story. Explain why the company acted, what is happening today, and, if possible, what will happen tomorrow. More and more businesses are filing pre-packaged bankruptcies that include the exit plan. A clear beginning and end to the story take the edge off the surprise and can inspire confidence in the company and its executives.
• Tell the story everywhere, not just in a press release. Many people get their news from social media, so push information out through platforms such as Facebook, LinkedIn and X that reach large numbers of stakeholders. Also, don’t be afraid to set up meetings or calls to deliver the news personally.
• Respond quickly to misinformation and disinformation. Rumors spread fast on social media. Monitor popular platforms and respond quickly on those channels and your website. Unscrupulous actors who would financially benefit from your company’s increasing financial pain will spread lies. Counter their messaging and take legal action if needed.
• Keep telling the story. Going mute after the initial filing leaves space for others to fill the silence with their version of events. Social media and some news media feed off of conflict–real and imagined–and that can hurt the company’s relationship with its stakeholders.
• Highlight future plans. After your company submits a prepackaged court filing, keep all stakeholders informed of your progress toward coming out of bankruptcy. Show how the company operates better afterward.
• Watch for surprises. Even the best-designed bankruptcy plan can be detoured once it is in the court’s hands. Unexpected events require an immediate response to maintain credibility.

Show the company’s human side. Show sympathy and understanding for those most affected, such as employees who lose their jobs; customers inconvenienced and vendors who are not paid in full. Show the company’s efforts to minimize the harm in personal terms, such as helping laid-off workers find employment elsewhere.

Donald Silver is COO and co-lead of BoardroomPR’s busy crisis management practice group. He can be reached at donsil@boardroompr.com or 954-370-8999.

Reprinted with permission from the January 21, 2025 edition of the Daily Business Review © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.