What is Chapter 11 bankruptcy?

Bankruptcy is a legal declaration to help clear the burden when a small business or individual is overwhelmed with debt. It initiates a process where creditors often agree to new, and lesser, payments in effort to recoup some of the money they are owned.

There are different types of bankruptcy within US code, but Chapter 11 is one of the most prominent types declared by businesses because instead of selling assets to keep the ship afloat, it calls for a pause and a re-launch instead.

The primary purpose of Chapter 11 bankruptcy is to allow a company to restructure itself and introduce solvency while meeting creditor obligation. Sometimes internal leadership positions will change during a filing, but there is no requirement that a business install new personnel. It must, however, formulate a new business plan that reduces the debt to revenue ratio while making good on promises to its creditors.

How does Chapter 11 work?

In a nutshell, Chapter 11 bankruptcy is declared because of problematic debt. While other bankruptcy chapters can call for liquidation of a company or its assets, Chapter 11 has a restructuring focus to keep the income flowing throughout the process. Leadership normally remains in place for daily operations. Meanwhile, major decisions transition to the court, such as lease and property renewals or sales, expansion or reduction of operations and the (re)negotiation of contracts and agreements.

In a broad overview, the business continues operations while being internally reconfigured. If the company can’t come up with a plan that creditors like, creditors can either suggest their own restructuring or they can move the bankruptcy to Chapter 7 (liquidation).

Creditors generally seek a repayment comparable to what they would get through a Chapter 7 case. If the declaring business can meet that basic goal, creditors tend to accept Chapter 11.

How to file

Before filing, a company must undergo credit counseling and must have waited at least 6 months since any previous bankruptcy filing. There are notable administrative fees that near $2,000 in total. The filing then kicks off an automatic stay, meaning creditors can’t make new demands until the case is heard.

Once the new structure and payment plan goes into action, if a debtor again fails to make payment, the case can be renewed or moved to Chapter 7, which will likely mean the closing of the business.

Each business will have unique needs, demands and obligations. Through filing a Chapter 11 bankruptcy, the intent is to restructure operations while remaining open.