# Chapter 11 Bankruptcy: What's Involved, Pros & Cons of Filing

![Chapter 11 Bankruptcy: A form of bankruptcy that allows a company to stay in business and restructure its obligations.](https://www.investopedia.com/thmb/dKhnOuvf6a_Xw_0kKJ8vIiJyubY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/chapter11.asp-final-a6438081c9404e558ffd30fea56fff87.png)

*— Investopedia / NoNo Flores*

## 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.

### Key Takeaways

*   With Chapter 11 bankruptcy, a company is restructured and supervised by a court-appointed trustee to reorganize its finances and operations.
*   Chapter 11 bankruptcy is often called reorganization bankruptcy.
*   Corporations can file Chapter 11 bankruptcy and continue to do business.

## 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](https://www.investopedia.com/terms/r/reorganization.asp) bankruptcy.  

### Note

It's rare but possible for individuals who are ineligible for Chapter 7 or Chapter 13 [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) to be eligible for Chapter 11, although individuals must file additional paperwork not required of businesses. Instead, Chapter 11 is most commonly used by corporations and partnerships that want to keep their businesses alive and continue to operate.

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 [liquidating](https://www.investopedia.com/terms/l/liquidate.asp) 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](https://www.investopedia.com/terms/t/trustee.asp) 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 advantages to Chapter 11, there are drawbacks to consider.

Pros

*   You can continue doing business
    
*   You may be granted emergency relief
    
*   You are protected under the automatic stay
    
*   Your business monthly debt load is reduced
    
*   You can eliminate certain debts and renegotiate others
    
*   You won't be harassed by creditors
    
*   You have additional time to pay your federal tax debt
    

Cons

*   You have to repay your company’s debts
    
*   Your business won’t have access to credit in the coming years
    
*   The process can take several years
    
*   Filing Chapter 11 can be expensive
    

## 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 [differences between Chapter 7 and Chapter 11](https://www.investopedia.com/ask/answers/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 [student loans](https://www.investopedia.com/how-to-file-student-loan-bankruptcy-4772237).

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 vs. Chapter 7

Chapter 11

*   Restructures the company so it can continue operating  
    
*   Debts are repaid over time as a result of reorganizing  
    
*   More commonly used by companies 
    
*   Most expensive and complex type of bankruptcy
    
*   Typically used to reorganize business operations and finances
    

Chapter 7

*   Liquidizes assets in order to satisfy debts
    
*   Remaining debt is usually forgiven  
    
*   Can be filed by individuals or businesses
    

## 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 [restructuring](https://www.investopedia.com/terms/c/corporate-debt-restructuring.asp), 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 [Chapter 11 to make financial sense](https://www.investopedia.com/articles/pf/08/bankruptcy-filing.asp), you must learn whether reorganization is enough to repay 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.

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