What Is Chapter 11?

Chapter 11 is a type of bankruptcy that reorganizes a struggling company's debts to allow it to stay open and become solvent. A court-appointed trustee oversees the reorganization. Although individuals can file Chapter 11 bankruptcy, it's most commonly filed by businesses.

Businesses can also file other bankruptcy chapters depending on their financial situation. For instance, Chapter 7 liquidates a business's assets to satisfy debts. Other types, like Chapter 9 or Chapter 12, are primarily used by municipalities or family farmers and fishers, respectively. Chapter 7, Chapter 11, and Chapter 13 are some of the most common types filed by individuals and businesses.

How Chapter 11 Bankruptcy Works

Chapter 11 can give a struggling business much-needed time to restructure its operations and debts. This essentially gives the company a fresh start and helps it repay its debts rather than forgiving them, which is why it's known as reorganization bankruptcy.

To file Chapter 11, the business (called the debtor) files a petition with the local bankruptcy court. The business must include a comprehensive statement of its financial affairs and a schedule of its assets, liabilities, contracts, expenditures, and leases. There's also a substantial fee that must be paid to the clerk, although it is possible to pay it in installments.

The business can propose a reorganization plan that includes downsizing, renegotiating contracts, or 澳洲幸运5官方开奖结果体彩网:liquidating assets. The court can agree to the plan or work with the business♑ to devise a different one.

Either way, the company can continue operating, but cannot make certain decisions without court approval. For example, a business in Chapter 11 bankruptcy can't expand its operations or sell assets not specified in the reorganization plan. The company isn't allowed to take on any new loans that would begin after filing for bankruptcy.

Unlike other types of bankruptcy, the debt is not forgiven. Instead, businesses stay open and adjust operating procedures in order to increase profitability. This allows them to repay their debts. It's important to note that if a company is found to be dishonest, fraudulent, or grossly incompetent, the court will appoint a trustee to run the company during bankruptcy.

Chapter 11 allows businesses to balance the books and become viable by significantly changing their management and operations.

Pros and Cons of Chapter 11 Bankruptcy

Although there are distinct a🧸dvantages to Chapter 11, the👍re are drawbacks to consider.

Chapter 11 vs. Chapter 7

Businesses and individuals have options when filing for bankruptcy. In addition to Chapter 11, Chapter 7 is commonly filed. However, the 澳𝓰洲幸运5官方开奖结果体彩网:differences between Chapter 7 and Chapter 11 make each suited for different situations.

Chapter 7 is more often used by individuals struggling with insurmountable debt. A court-appointed trustee sells as many assets as possible to repay the individual's debts. Whatever debt is left after the assets are liquidated is usually forgiven. That said, Chapter 7 doesn't forgive an individual's tax debt, alimony, child support, or 澳洲幸运5官方开奖结果体彩网:student loans.

On the other hand, Chapter 11 is primarily filed by businesses that wish to remain in 🌜business. To become solvent while still operating, the company files bankruptcy to reorganize its debt. The company retains control of its assets while implementing the restructuring plan and repays debts as it becomes profitable again.

Chapter 11 Example

It's not uncommon for large, well-known businesses to file Chapter 11, sometimes repeatedly within a short span of time. For example, Party City, the largest retailer of party goods in North America, filed for Chapter 11 in early 2023. The company worked with a restructuring advisor and received $150 million to keep operations running during the proceedings.

By the end of 2023, Party City had repaid $1 billion of its debts by 澳洲幸运5官方开奖结果体彩网:restructuring, closing 800 stores, and renegotiating the terms of its leases. The company continued to operate but couldn't overcome its remaining $800 million debt. In December 2024, Party City announced it would auction off leases for its buildings and cease operations.

Is Chapter 11 Your Best Choice?

While Chapter 11 can give a business or individual a fresh start, it's not a decision to be taken lightly since there's significant time and expense involved. Before filing, assess the overall health of your company and speak with legal and financial advisors. For 澳洲幸运5官方开奖结果体彩网:Chapter 11 to make financial sense, you must learn whether reorganization is enough to r﷽epay debts and make the business profitable. If you have stakeholders, you need to communicate with them throughout the process.

In short, you should exhaust all other options, like negotiating directly with creditors or considering insolvency, before filing for bankruptcy. If you've done so and it's agreed that Chapter 11 is the right path forward, you should be able to generate cash flow that can help your business recover.

The Bottom Line

Even after giving Chapter 11 careful thought, it's still a good idea to consult legal and financial advisors. Chapter 11 is a lengthy, complicated, and expensive process that's not right for every company or individual. However, for companies with a solid reorganization plan, a business can stay open and even become profitable.