Chapter 11 bankruptcy
The business-reorganization chapter. Companies keep operating while restructuring debts, renegotiating contracts, and proposing plans to creditors. Subchapter V makes this workable for small businesses. When Chapter 11 beats Chapter 7 or 13, and what it actually costs.
Who Chapter 11 is for
Chapter 11 is primarily a business chapter, though individuals can file in specific circumstances. The common thread: the filer has enough value as an ongoing concern that liquidating would destroy wealth, and the filer has a realistic path to emerge from bankruptcy as a viable entity. Corporations, LLCs, partnerships, and sole proprietorships can all use Chapter 11. Public companies use it when they can't service debt. Private companies use it when they need to shed unfavorable contracts, sell underperforming units, or restructure secured debt.
Individuals sometimes file Chapter 11 instead of Chapter 13. Two scenarios: (1) the individual's debts exceed Chapter 13's limits ($1.4M unsecured, $4.2M secured), or (2) the individual has a complex financial structure (multi-state real estate, active business interests, multiple LLCs) that Chapter 13's streamlined process can't handle. Individual Chapter 11 cases are expensive and procedurally complex but provide flexibility that Chapter 13 lacks.
Subchapter V: streamlined Chapter 11 for small businesses
The Small Business Reorganization Act of 2019 (effective February 2020) added Subchapter V to Chapter 11, creating a simpler path for small business debtors. Subchapter V eliminates many of the cost drivers of standard Chapter 11:
Debt ceiling: $7.5M
Subchapter V is available for debtors with total debts under $7.5 million (a temporary COVID-era increase from $2.75M, made permanent). Debtors above this threshold must use standard Chapter 11.
No unsecured creditors committee
Standard Chapter 11 requires the US Trustee to form a committee of unsecured creditors, which has lawyers paid by the estate. Subchapter V eliminates this committee by default. Saves tens of thousands in fees.
Simplified disclosure and plan
No separate disclosure statement (required in standard Chapter 11). Plan process is faster: debtor has exclusive right to file a plan for 90 days after filing. Confirmation can happen within 6 months.
Debtor-friendly confirmation
Plans can be confirmed without creditor votes if the debtor commits disposable income for 3-5 years. This is the biggest benefit: small business debtors can confirm plans over creditor objections as long as the plan meets statutory fairness tests.
Continued management
Like standard Chapter 11, existing owners and management continue running the business. The Subchapter V trustee monitors the case and assists with the plan but doesn't take over operations.
Faster and cheaper
Typical Subchapter V cases cost $25,000 to $75,000 in attorney fees for small business cases, compared to $100,000+ for similar-sized businesses under standard Chapter 11.
The Chapter 11 timeline
| Stage | Timing | What happens |
|---|---|---|
| Pre-filing planning | Weeks to months before | Assemble legal and financial advisors, arrange DIP financing if needed, prepare schedules and statement of financial affairs. |
| Petition filed | Day 0 | Petition and first-day motions filed. Automatic stay stops collections. Debtor becomes "debtor in possession." Court may authorize emergency cash management, payroll, and critical vendor payments. |
| 341 meeting | Day 20-40 | Meeting of creditors with the US Trustee. Creditors can attend and ask questions under oath. |
| Operating period | Ongoing during case | Debtor continues operations, files monthly operating reports, pays US Trustee quarterly fees. Court approves major decisions (sales, financing, contract rejections). |
| Exclusivity period | Day 0-120 (extendable) | Only the debtor can propose a reorganization plan during the initial 120 days. Debtor can request extensions up to 18 months for complex cases. |
| Disclosure statement hearing | Varies (not in Subchapter V) | Court approves the disclosure statement (document that describes the plan to creditors) as "adequate information." Required in standard Chapter 11. |
| Plan voting | 30+ days | Creditors receive the plan and vote by class. Each impaired class needs 2/3 in dollar amount and more than half in number of claims to accept. |
| Confirmation hearing | Typically 6-18 months in | Court reviews plan and creditor votes. If the plan meets statutory requirements, judge confirms. Confirmation makes the plan binding on all creditors. |
| Plan implementation | Post-confirmation | Debtor executes the plan: distributions to creditors, asset sales, financing closings, operational changes. Case usually closes after implementation is complete. |
Chapter 11 vs Chapter 7 for a business
Choose Chapter 11 when
The business has ongoing value (customers, brand, skilled workforce) that would be destroyed in liquidation. Fixable operational issues exist. Owners want to continue operations. Going-concern value exceeds asset value.
Choose Chapter 7 when
The business has no meaningful going-concern value. Liquidation will return more to creditors than reorganization. Owners want to close the business and move on. Continuing operations would just accumulate more debt.
Sell as a going concern
Middle path: file Chapter 11, use the "363 sale" process to sell the business as a going concern to a new owner, then convert to Chapter 7 or dismiss. Preserves more value than liquidation, captures some acquisition premium.
Assignment for the benefit of creditors
State-law alternative to federal bankruptcy. Debtor assigns assets to a trustee who liquidates and distributes to creditors. Faster and cheaper than Chapter 7 for small businesses that just need to wind down.
High-profile Chapter 11 outcomes
Chapter 11 produces a mix of successful reorganizations and effective liquidations. Historical examples help illustrate what's possible:
- General Motors (2009): Government-backed quick Chapter 11. GM emerged in 40 days with restructured debts, sold underperforming brands, and survived. Shareholders wiped out.
- Delta Airlines (2005-2007): Used Chapter 11 to reject unfavorable pension obligations and lease terms, renegotiate union contracts. Emerged stronger and eventually acquired Northwest.
- Toys R Us (2017): Chapter 11 failed to produce a viable plan. Converted to Chapter 7 and liquidated. Going-concern premium over asset value turned out to be zero.
- WeWork (2023): Classic reorganization with debt-for-equity swap. Emerged from bankruptcy in 2024 with most leases rejected or renegotiated, existing equity wiped out.
Frequently Asked Questions
-
What is Chapter 11 bankruptcy?
Chapter 11 is the "reorganization" chapter designed primarily for businesses. The debtor (usually the business) continues operating while proposing a plan to restructure debts, renegotiate contracts, sell assets, or raise new capital. Creditors vote on the plan, and if approved by the required classes and confirmed by the court, the plan becomes binding. Chapter 11 is flexible — large corporations, small businesses, and individuals with high debt can all use it.
-
Who uses Chapter 11?
Primarily businesses. Most large corporate bankruptcies (airlines, retailers, restaurants, manufacturers) are Chapter 11. Small businesses use Chapter 11 when they want to continue operating while restructuring, though most small businesses now use Subchapter V (a 2019 addition that streamlines Chapter 11 for small businesses). Individuals with debts exceeding the Chapter 13 limits ($1,395,875 unsecured and $4,187,525 secured) use Chapter 11 because they can't fit in Chapter 13.
-
How much does Chapter 11 cost?
Court filing fee is $1,738 plus a $571 administrative fee (so roughly $2,309 to file). Quarterly US Trustee fees range from $325 to over $250,000 depending on disbursements. Attorney fees are far higher than Chapter 7 or 13 — typically $10,000 retainer for small businesses, $100,000+ for mid-size companies, and millions for large corporate cases. This is why Chapter 11 is rarely cost-effective for small debtors; Subchapter V reduces this meaningfully.
-
What is Subchapter V of Chapter 11?
Subchapter V (added by the Small Business Reorganization Act of 2019) is a simplified version of Chapter 11 for small business debtors with debts under $7.5 million (reduced from $2.75 million; raised to $7.5M during COVID, now permanent). It eliminates many of the administrative requirements of standard Chapter 11, has no unsecured creditor committee by default, and gives the debtor more control over the plan process. Small businesses that previously couldn't afford Chapter 11 now use Subchapter V for faster and cheaper reorganization.
-
How long does Chapter 11 take?
Highly variable. Small business Subchapter V cases often confirm plans in 6 to 12 months. Standard Chapter 11 for small companies typically runs 12 to 24 months. Large corporate cases can take 2 to 5 years. The timeline depends on plan complexity, creditor objections, asset sales, and operational restructuring. Chapter 11 keeps the automatic stay in effect throughout the case, protecting the debtor from collection actions during the entire reorganization.
-
Can I keep running my business in Chapter 11?
Yes, in almost all cases. The debtor becomes the "debtor in possession" (DIP), which means existing management continues running the business under court supervision. The court must approve major decisions (sales of assets outside ordinary course, borrowing new money, rejecting major contracts), but day-to-day operations continue. A trustee is only appointed if the court finds fraud, gross mismanagement, or other exceptional circumstances.
-
What happens to secured creditors in Chapter 11?
Secured creditors must be paid at least the value of their collateral through the plan, typically over an extended period with a reasonable interest rate. They can object to the plan's treatment of their claim, and the court has to resolve disputes about collateral valuation, interest rates, and payment terms. Secured creditors often get the best terms in Chapter 11 because they have collateral leverage.
-
What happens to equity holders in corporate Chapter 11?
Under the "absolute priority rule," existing shareholders typically get wiped out in Chapter 11 unless they contribute new value to the reorganized company. Common stock is usually canceled. New equity is issued to creditors (often former unsecured creditors, whose debts get converted into equity) or to new investors who provide "DIP financing" (debtor-in-possession loans). This is why Chapter 11 for public companies usually destroys public shareholder value even when the business itself survives.
-
What's the difference between Chapter 11 and Chapter 7 for a business?
Chapter 7 for a business is liquidation: the trustee sells all the assets, distributes the proceeds to creditors, and the business ceases operations. Chapter 11 is reorganization: the business continues operating while restructuring. Owners choose Chapter 11 when the business has ongoing value that would be destroyed by liquidation (customer relationships, brand equity, skilled workforce, going-concern premium over asset value). Chapter 7 is faster and cheaper; Chapter 11 preserves more value when it works.