I have Phals that I've had for a long time, and as they age, the older leaves die, and leave a bare stem below the fresh leaves. It looks unsightly, and the roots from the upper part of the plant struggle to reach the medium below if humidity is not ideal. If the plant has plenty of roots on the top part of the plant, it is perfectly okay to cut the stem just a little bit below the leaves and plant it like that. Like Ray said, let it sit dry a couple days for the wound to dry and scab over.
As far as what to do with the roots on the top portion of the plant, I just put whichever ones easily fit into the pot inside the pot and cover them with growing media. Ones that cannot easily be coaxed into the pot with breaking them get left out in the air, and that's fine.
You mentioned that the stem may be rotting below where the leaves are, in which case the roots in the pot are probably bad and you'll have to just throw it all away, but on a plant with a healthy stem and some healthy roots still in the pot, you can keep the pot with the bare stem from the bottom, and sometimes it will sprout a side shoot and grow a new plant, so hang on to the bottom portion of the plant too if you think there's still healthy roots and stem down there.
The short version of this is that yes, if the plant has a tall bare stem that you find unsightly, and it has plenty of roots on the upward, leafy part of the stem, there is no problem with cutting it away from the bare stem and planting it.
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