Chapter 11 allows a business to continue operating while restructuring its debts under court supervision. The business proposes a reorganization plan that creditors vote on and the court confirms.
Chapter 11 is the reorganization chapter of the federal bankruptcy code. Unlike Chapter 7, the business remains open. Management typically continues running operations as the 'debtor in possession.' A reorganization plan must be filed within a specified period (usually 120 days for the debtor exclusively, extendable by the court), proposing how debts will be repaid or discharged. The process is expensive and complex. Professional fees — attorneys, financial advisors, restructuring consultants — commonly run $50,000–$500,000+ for mid-size businesses. Creditor committees form. The automatic stay halts all collection actions. The court oversees major business decisions during the case. Subchapter V of Chapter 11 (added by the Small Business Reorganization Act of 2019, SBRA) provides a streamlined, less expensive path for businesses with total debt under $7.5 million (as of the COVID-era temporary increase, subject to periodic adjustment). Subchapter V eliminates creditor committees in most cases, allows the debtor to retain equity without full creditor repayment, and assigns a standing trustee to facilitate (not control) the process. It has become the preferred path for qualifying SMBs. After a confirmed plan, the business emerges from bankruptcy with a restructured balance sheet — reduced debt load, potentially modified lease terms, renegotiated contracts. Emergence is not guaranteed; cases can convert to Chapter 7 if the plan is not confirmable or if operations deteriorate.
Subchapter V (added in 2019) is a streamlined Chapter 11 path for small businesses with total debt under the statutory threshold (currently $7.5M). Key differences: no creditors' committee (reduces cost), debtor can retain equity even without full creditor repayment, a standing trustee facilitates but doesn't control, and the process is faster. For qualifying SMBs, Subchapter V is almost always preferable to standard Chapter 11.
Yes. Debtor-in-possession (DIP) financing allows a company to borrow during the Chapter 11 case to fund operations. DIP lenders get super-priority status — they're paid before pre-petition creditors. DIP financing is typically expensive and requires court approval, but it's a critical tool for keeping the business operational during reorganization.
Filing triggers the automatic stay — secured creditors cannot foreclose or repossess without court relief. Existing loan agreements become part of the reorganization process. Secured lenders may be 'crammed down' (paid the collateral's current market value rather than full face amount). Post-confirmation, the reorganization plan governs repayment terms.
For a corporation or LLC filing, the bankruptcy does not automatically appear on the owner's personal credit report (it's an entity filing, not a personal filing). However, if the owner has personal guarantees, the guarantee is subject to the plan. If the owner files personally alongside the entity, it appears on personal credit for 10 years.