What Is a Chapter 11?

What Is a Chapter 11?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Chapter 11 is a type of bankruptcy proceeding in the United States. It allows businesses, and sometimes individuals, to restructure and eliminate debts while under the protection of the bankruptcy court. During this process, the debtor can propose a plan of reorganization to keep its business alive and pay creditors over time. Despite having a sense of adventure, a Chapter 11 bankruptcy is not always a smooth sailing. It can be a complex and expensive process, which could sometimes take many years to conclude.

Related Questions

1. How is a Chapter 11 different from a Chapter 7 bankruptcy?

In a Chapter 7 bankruptcy, businesses or individuals liquidate their assets to pay off their debts. The remaining debts are then discharged. In contrast, Chapter 11 allows entities to reorganize their debts and continue operating.

2. Who can file for Chapter 11 bankruptcy?

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Any business, whether it is a corporation, partnership, or a sole proprietorship, can file for Chapter 11 bankruptcy. In some cases, individuals who have debts too large for Chapter 13 bankruptcy can also file under Chapter 11.

3. What happens to a business when it files for Chapter 11?

During a Chapter 11 case, the business usually remains in control of its operations as a “debtor in possession”. The business gets the first chance to propose a reorganization plan, but creditors can also propose plans.

4. Can a business continue to operate while in Chapter 11?

Yes, a business can often keep operating while going through a Chapter 11 bankruptcy. The bankruptcy court will oversee major decisions, but in general, the debtor can continue regular operational activities.

5. Does Chapter 11 bankruptcy affect the personal credit of business owners?

If the business is a separate legal entity like a corporation, its bankruptcy does not affect the personal credit of its owners. However, if the business is a sole proprietorship, the personal and business credit of the owner might be affected.