Understanding Bankruptcy
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Chapter 11 Bankruptcy: Understanding the Basics

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Content was accurate at the time of publication.

Business owners and individuals struggling under the weight of debt may find new life under Chapter 11 bankruptcy. Commonly called reorganization bankruptcy, Chapter 11 allows businesses to continue operating while the business owner and creditors reorganize the debts so the business can be profitable once again.

However, keeping a business running isn’t the only reason to consider bankruptcy. This guide explains how Chapter 11 bankruptcy works and when business owners and individuals may want to consider filing.

What is Chapter 11 bankruptcy?

Chapter 11 bankruptcy is commonly called reorganization bankruptcy. It allows a business to continue operations while the business makes a plan to repay or discharge its debts. The plans are designed to keep the business operational during and following the bankruptcy process.

A lot of people think of Chapter 11 bankruptcy as only for big businesses. After all, many large corporations — from Toys ‘R’ Us to Kmart — have filed for Chapter 11 bankruptcy. However, small business owners who want to keep a business running but need some debt relief may also benefit from filing for Chapter 11. Most small business owners who want to continue running their businesses will maintain ownership of their operations during the bankruptcy process.

During bankruptcy proceedings, a business remains operational and the business owner can continue to make most decisions about how to maximize sales and profit for the business. The business can sell inventory and is generally free to purchase materials to complete new contracts.

However, small business owners face some important limitations. For example, they must seek permission to sell assets (except inventory) and to start or end rental contracts. The court also must approve the employment of lawyers or other service providers in connection with the bankruptcy.

Business owners also have to provide monthly reports that keep the courts informed of the business’s financial situation. Reports generally include business income and an expense report.

What happens to debts and assets under Chapter 11 bankruptcy?


Unlike other types of consumer bankruptcy, Chapter 11 bankruptcy does not strictly define what will happen to debts. Certain types of debts (such as student loans, unpaid child support, and unpaid taxes) are not dischargeable, so if these are part of the bankruptcy, the plan must include a way to pay those back. A business that owes back taxes must repay them within five years.

Outside of excluded debts, it is up to the person or entity filing for bankruptcy to propose a plan to pay back some or all of the debts. Typically, these debts may be paid back partially or in full over the course of several years, and some may be completely discharged. Repayment plans commonly last five years, but in some rare cases, Chapter 11 bankruptcy can take up to 10 years.


Under Chapter 11 bankruptcy, a business or person generally gets to keep most of their assets, though the debtor could propose to sell many of their assets as part of the reorganization plan. In fact, a business owner could choose to sell the entire business under Chapter 11 bankruptcy.

It’s important to note that an individual’s personal assets may be used to pay creditors in a Chapter 11 bankruptcy case. Owners of corporations do not have to worry about having their assets included in the case, but sole proprietors or partners in a partnership may have their assets included in the filing. This doesn’t mean that they will automatically lose their personal assets, just that the assets may not be perfectly protected.

When does filing Chapter 11 bankruptcy make sense?

Chapter 11 bankruptcy is a useful but expensive tool. It may make sense in the following situations:

Small businesses

Small business owners who want to keep their business running may get debt relief from Chapter 11 bankruptcy. Filing for bankruptcy may help with debts, but it won’t address insufficient income. If a small business is struggling to bring in revenue, Chapter 11 won’t help.

Large businesses

Large businesses that want to prevent the sale or liquidation of the company may be able to reorganize and shed enough debt to continue operating for shareholders.


If a debtor owes a lot of money and isn’t paying their obligations, a creditor may be able to force them into involuntary Chapter 11 bankruptcy.


Individuals with debts that exceed the Chapter 13 bankruptcy limits ($465,275 in unsecured debts and $1,395,875 in secured debts) may file for Chapter 11 instead. People with smaller debts may choose Chapter 11 if the fees for filing are less than the expected commissions for Chapter 13 bankruptcy.

Cost of filing Chapter 11 bankruptcy

It costs $1,738 to file for Chapter 11 bankruptcy, but the real costs start when you pay attorney’s fees. Attorney’s fees for an individual Chapter 11 bankruptcy cost at least $10,000 but can go much higher. Typical fees for small business Chapter 11 bankruptcy run from $15,000-$30,000, but can go as high as $100,000, depending on the complexity of the case.

The high costs of attorney’s fees make Chapter 11 bankruptcy relatively unappealing, except in cases involving a large amount of debt. If Chapter 11 bankruptcy makes sense in your situation, compare fees from multiple lawyers. You may be able to find a less expensive bankruptcy attorney who is equally qualified to represent you.

How long does it take?

A person or business filing bankruptcy has a maximum of 18 months to propose a reorganization plan before creditors can step in and take an active role in proposing a plan. In practice, small business owners and individuals should be able to create an approved plan before the 18-month window closes.

The repayment phase of Chapter 11 bankruptcy can either take a short time (as with the sale of a business) or it can take years. It is not specifically limited to a certain payoff period, but a five-year repayment plan is common.

Pros and cons of Chapter 11 bankruptcy

Chapter 11 bankruptcy generally allows a business owner to maintain ownership of their business. This is the number one advantage of Chapter 11 bankruptcy compared with Chapter 7 bankruptcy, which requires a business owner to liquidate the company or sell it entirely to pay off debts. Still, bankruptcy can be time-consuming, expensive and discouraging, so it’s important to weigh both the pros and cons of filing bankruptcy.


No debt limits

Long timeline (commonly 5 years)

Assets can typically be kept

Personal assets may not be perfectly protected

Could be less expensive than Chapter 13

Could end up being much more costly (potentially up to $100,000 or more)

Unpredictable outcome, cost and timeline

Unlike Chapter 7 or Chapter 13 bankruptcy, Chapter 11 bankruptcy can be unpredictable. In some cases, filing Chapter 11 is less expensive than the other chapters. On the other hand, lawyer’s fees tend to run much higher in Chapter 11, sometimes as much as $100,000 (compared to an average of $2,000 for Chapter 13). The outcome is also less predictable; some debtors are left repaying debts for up to a decade, and in some rare cases, business owners could be forced to sell or liquidate the company.

The Chapter 11 bankruptcy process


Every Chapter 11 case starts with filing a petition for bankruptcy. Most of the time, the person or business in debt will be the one to file this petition. You must pay $1,738 to file a Chapter 11 petition for bankruptcy. If you are not paying your debts, a creditor could file an involuntary Chapter 11 bankruptcy against you.

Automatic stay

As soon as the bankruptcy petition is filed, you are granted an automatic stay of creditor actions against you. That means that your creditors cannot do anything to collect or enforce existing liens against you.

An automatic stay gives Chapter 11 filers some breathing room while they work out a plan to repay their debtors.

Debtor in possession

The debtor in possession is the person or entity that files for bankruptcy. In Chapter 11 bankruptcy, the debtor in possession takes a very active role in the bankruptcy process. Most of the time, the debtor in possession will act as the bankruptcy trustee in the case.

This means the debtor in possession is responsible for meeting reporting requirements and for proposing a reorganization and repayment plan that suits the law. On top of that, the debtor in possession retains the right to operate their business with limited oversight from the court.

Meeting with creditors

Shortly after filing bankruptcy, a committee of creditors will be appointed by the U.S. trustee. The committee will usually include unsecured creditors who hold the seven largest claims against the debtor in possession. Of course, if you or the business has fewer than seven debts, the committee will be smaller.

The debtor in possession and the committee of creditors will meet at a “section 341 meeting.” These meetings give the committee of creditors and the debtor in possession the opportunity to negotiate a reorganization plan. The reorganization plan will include a plan for keeping the business operational while repaying the creditors.

Plan proposal

The plan of reorganization is at the heart of Chapter 11 bankruptcy. The plan for reorganization allows a business or an individual to keep their assets while repaying some of their debts over time. Business owners may also opt to sell some or all of their assets to fulfill debt obligations.

A debtor in possession has 120 days to file a plan of reorganization. However, that period may be extended to up to 18 months by the court. After that, creditors can jump in and propose plans of their own. A plan must be accepted by a majority of creditors (and account for at least two-thirds of the debts owed).

For the courts to accept the plan, the courts must agree that the debtor in possession can reasonably make the monthly payments associated with the plan. The plan must be in the best interest of the creditors, and provide them with more money than what would have been provided under Chapter 7 bankruptcy. It must be fair and equitable and be proposed in good faith.

Unlike repayment plans in Chapter 13 bankruptcy or liquidation plans in Chapter 7 bankruptcy, the actual reorganization plan will be uniquely tailored to the circumstances of the debtor and the creditors. The only hard rule is that taxes must be paid within five years, and the plan must meet the requirements listed above. Outside of that, courts wide scope in how the plan can be implemented.

Confirmation of plan

Once a sufficient number of creditors agree to the plan, the bankruptcy trustee will call a confirmation hearing. In general, a plan that has been accepted by the creditors and meets statutory requirements is likely to be approved by the courts.

Once the plan is approved, the repayment period begins.

Plan repayment

Once a plan is in place, it will be implemented by the debtor in possession. Usually, this means that the debtor will make monthly payments until the plan obligations are fulfilled. In some cases, the plan may entail the debtor selling certain assets and disbursing the funds to creditors. The plan repayment phase may last several years.

Debts are discharged

Once the debtor has fulfilled the obligations in the plan, the remaining debts are discharged. That means that the debtor no longer owes the debt, and creditors cannot make an effort to collect them. With the debts wiped out, the debtor can begin to recover their financial and credit health.

Comparing types of bankruptcy

Bankruptcy can be extraordinarily complicated. With so much on the line, it is wise to consult with a qualified bankruptcy attorney to guide you through the process and decide which type of bankruptcy is right for you.

Chapter 11 vs. Chapter 7

Small business owners (with partnerships or corporations) must decide between Chapter 7 and Chapter 11 bankruptcy. Chapter 11 bankruptcy allows the owner to continue operating the business while reducing debts. While the owner may opt to sell some assets, it isn’t always required.

Chapter 7 bankruptcy, on the other hand, requires the business to liquidate its nonexempt assets to repay creditors. While there is a filing fee (and attorney’s fees, if you hire one), the overall costs of filing Chapter 7 bankruptcy are typically much lower.

Chapter 11 vs. Chapter 13

In a limited number of cases, some individuals with complex finances or a large amount of debt may find Chapter 11 bankruptcy cheaper than Chapter 13 bankruptcy, which is the typical bankruptcy for high-income individuals. Lawyers’ fees for Chapter 11 bankruptcy are typically far more expensive than fees for Chapter 13 bankruptcy (at least $10,000 versus $1,800). In cases involving large debt loads, however, bankruptcy commissions may lead to Chapter 13 bankruptcy exceeding the cost of Chapter 11.

Under Chapter 13 bankruptcy, debtors have to pay a commission to a bankruptcy trustee (up to 5% of the total payment). By contrast, debtors administer bankruptcy payments themselves under Chapter 11 bankruptcy.

Alternatives to bankruptcy

If your business is facing financial trouble, you may have options other than declaring bankruptcy. These are a few of the common ways that businesses and individuals can find debt relief without declaring bankruptcy.

Negotiating outside of court

If your business is struggling under the weight of a single debt, you may be able to negotiate a debt reduction or a new repayment schedule outside of bankruptcy court. This can be quicker and less costly than an expensive Chapter 11 bankruptcy. However, a business struggling with multiple debts may find that filing bankruptcy helps the business negotiate with multiple creditors at once.

Selling the business

If your business is viable, you may be able to sell the business and pay off the existing debts. If you’re considering selling a financially troubled business, you may still want to consult a bankruptcy attorney. A business may be able to clear debts by selling the business as a “going-concern” under Chapter 11 bankruptcy law.

Closing the business

A business with very few real assets and a lot of debt may not need to go through the hassle of declaring bankruptcy. By closing up shop, the business will default on its debts, but creditors may not go after the difference. It’s important to consult with a bankruptcy attorney and a credit counselor before choosing this option since it could have adverse consequences (and you may still owe certain debts, such as taxes or debts that carry a personal guarantee).

Free consultations

In many parts of the country, lawyers offer free consultations to individuals or business owners who are considering bankruptcy. These consultations also give people an opportunity to compare the costs of several lawyers, and some attorneys may be able to recommend a unique solution that will help you avoid bankruptcy altogether.

Does Chapter 11 bankruptcy make sense for you or your business?

If you or your business is facing financial difficulty, set up a consultation with a local bankruptcy attorney. Be sure the attorney has experience with Chapter 7, Chapter 11 and Chapter 13 bankruptcy so they can make a solid recommendation for your case. Bankruptcy isn’t always the right option, but it could help you or your business get the debt relief you need.