Chapter 11 Bankruptcy: An In-Depth Guide 

What is Chapter 11 Bankruptcy? 

Chapter 11 bankruptcy is a legal process that allows businesses (and occasionally, individuals) with heavy debt to restructure while continuing to trade. What that looks like depends on the business. It could involve anything from selling off unprofitable brands, to reducing employee numbers, to renegotiating contracts—usually, it’s a combination of several measures. The idea is to use any savings or proceeds to pay an agreed amount of the debts owed. 

Unlike Chapter 7 bankruptcy, where a court-appointed trustee takes control of the debtor’s assets, when an organization or individual files for Chapter 11 bankruptcy, they are made the “debtor in possession,” or DIP. This means that they keep control of the business and continue to trade. Also known as reorganization bankruptcy, Chapter 11 bankruptcies are quite common in the business world, with big names like United Airlines and General Motors using the process to try to clear debts.  

Although businesses can continue to operate during the process, there are no guarantees that the company will survive. Reorganization can fail, leaving liquidation—selling off all or most of the company’s assets—as the only option. 

How Does Chapter 11 Bankruptcy Work?

Chapter 11 begins with the organization or individual filing a petition with the US bankruptcy court.  Upon accepting the petition, the court applies an “automatic stay,” which means that any creditors must stop trying to collect money owed until the reorganization plan is decided. It’s also possible for creditors to file an “involuntary’ petition against the debtor. 

The debtor in possession (the organization or individual filing for bankruptcy) makes a plan for the reorganization of the business and how they’re going to repay each creditor. Negotiations begin, with creditors suggesting any adjustments to the reorganization plan that they’d like to see. This negotiation can go on for some time, with proposals going back and forth.  

Finally, the court approves a version of the reorganization plan. Creditors then vote on whether to accept it—if two thirds vote “yes,” the plan is accepted. The debtor then takes the agreed actions, such as selling off parts of the business or renegotiating leases, using any proceeds to make payments toward the debt. Once the debtor has carried out all the actions detailed in the reorganization plan, the debts are discharged.  

Advantages	Disadvantages
The debtor gets time to restructure while continuing operations	Expensive and time-consuming
Allows debtor control (DIP) rather than a court-appointed trustee taking over	Requires ongoing court oversight and creditor negotiations
The debtor may be able to renegotiate contracts and leases in their favor	No guaranteed success—many companies fail despite filing

Table: Advantages and disadvantages of Chapter 11 bankruptcy

How to File for Chapter 11 Bankruptcy 

Filing for Chapter 11 bankruptcy is a complex process that can take up to two years—sometimes more—to complete. It is also expensive, and there are no guarantees that the business will survive. For these reasons, it’s important to be sure that filing for Chapter 11 bankruptcy is the right step to take before embarking on the process. Always get legal advice from a reputable financial advisor or bankruptcy attorney. Below, we take you through who is eligible and a step-by-step guide.

What are the Eligibility Requirements for Chapter 11 Bankruptcy? 

Chapter 11 bankruptcy is an option for individuals, partnerships, or corporations engaged in business activity and with a significant amount of debt. Examples of entities that can file include: 

• Corporations (C-corps, S-corps) 

• Limited liability companies (LLCs) 

• Partnerships 

• Sole proprietors 

• Individuals, if their debts exceed Chapter 13 limits 

Examples of entities not eligible to file include: 

• Government agencies 

• Stockbrokers and commodity brokers (unless they are liquidating) 

• Businesses recently involved in a bankruptcy case 

There are no specific debt requirements, but the debtor must prove financial distress. They must also show that the business is viable with the proposed reorganization and that the application has been made in good faith—if the court sees the filing as a delay tactic, it may dismiss the case. 

Filing for Chapter 11 Bankruptcy: Step by Step 

If you’ve determined that you or your business is eligible to file for Chapter 11, and you want to file, the process will go like this: 

Step 1: Pre-filing negotiations

Before filing for Chapter 11, it's a good idea to try to negotiate with creditors, suppliers, or employees. It might be possible to restructure debts or renegotiate payment terms without filing for bankruptcy. 

Step 2: Prepare the documents

To file the petition, you’ll need to provide a lot of information about the business and its finances. Use a financial advisor or bankruptcy attorney to make sure you don’t miss anything. Among other information, you’ll need to provide:  

• A complete list of creditors and debt amounts.  
• Statement of income, expenses, and cash flow data. 
• Corporate resolution (if applicable) – board approval for filing bankruptcy. 

The specific forms you’ll need to provide will vary depending on the circumstances,  but some examples include: 

• Voluntary Petition (Form 201) – official request to enter Chapter 11. 
• Schedule of Assets & Liabilities (Forms 206A/B & 206D/F) – complete list of business assets and liabilities. 
• Statement of Financial Affairs (Form 207) – details of financial history, recent transactions, and business operations. 
• Schedule of Executory Contracts & Leases (Form 206G) – list of ongoing contracts and leases. 

All bankruptcy forms are available on the US government website.  

Step 3: File the petition

Next, file the petition with the US bankruptcy court in the district where the business is based. Make sure to include all necessary paperwork and proofs. If the petition is accepted by the court, this triggers an automatic stay, which halts all collection actions by creditors.  

Step 4: Become debtor in possession

Usually, the court awards control of the business to the debtor as debtor in possession, although the court has oversight of the process. The DIP must: 

• Open new bank accounts specifically for bankruptcy operations. 
• Maintain accurate financial records. 
• File monthly operating reports with the court. 
• Keep all business assets insured. 
• Manage payroll and expenses. 
• Obtain court approval for major business decisions (e.g., asset sales, new financing). 

In cases where the debtor has been found to have committed fraud or gross misconduct, control may be awarded to a trustee. 

Step 5: File first-day motions

The debtor files first-day motions to keep business operations running smoothly. Common motions include: 

• Employee wage motion to pay wages and benefits. 
• Cash collateral motion to use bank funds for operations. 
•  Vendor and supplier motion to continue necessary business payments. 

The judge then reviews the motions and grants approval. 

Step 6: Formation of the creditors’ committee

The US trustee appoints representatives of the debtor’s seven biggest creditors to form the committee and negotiate on behalf of the creditors. 

Step 7: Develop the reorganization plan

The debtor assesses all liabilities, assets, income, and business operations and identifies areas that can be restructured. This could involve selling assets, renegotiating leases, reducing the number of employees, or any other cost-cutting methods. The plan must lay out:   

• How debts will be repaid or restructured. 
• Any asset sales or operational changes. 
• Projections for returning to profitability. 

The debtor must also include a disclosure statement explaining the plan. 

Step 8: Negotiate with creditors

The creditors’ committee reviews the plan and proposes any changes they think necessary. Negotiations can go on for several months and do not always result in consensus. In that case, the debtor can ask the court to apply a “cramdown,” which, if applied, forces the creditor to accept the terms of the reorganization plan, if they are fair. 

Step 9: Submit the plan

The agreed plan is submitted to the court and creditors vote on whether to accept it. The court uses several criteria to confirm or reject the plan, including: 

• Best interests test: Creditors must receive at least what they would in a Chapter 7 liquidation. 
• Feasibility test: The company must show it can meet repayment obligations. 
• Fair and equitable rule: Secured creditors must be repaid or retain their claims. 

Step 10: Implement the plan

The debtor carries out the actions agreed in the reorganization plan and makes all necessary payments. After this, the process is complete, the debts are discharged, and the business exits bankruptcy. If the reorganization fails and the agreed amounts cannot be paid, further action will be taken. Assets may have to be liquidated, and the business may have to cease trading. 

Chapter 11: An Example 

Many well-known businesses have filed for Chapter 11 bankruptcy, with varying degrees of success. One successful example is Delta Air Lines, which filed for Chapter 11 bankruptcy in September 2005 with over $20 billion in debt. Delta cut costs and improved efficiency by 

• Cutting unprofitable routes and focusing on key hubs. 

• Reducing fleet size and modernizing aircraft for fuel efficiency. 

• Lowering labor costs by renegotiating contracts with employees. 

• Cutting $10 billion in debt by renegotiating with creditors. 

• Securing $2.5 billion in new financing to stabilize operations. 

The company exited bankruptcy after only 19 months, merging with Northwest Airlines in 2008 to form one of the world’s largest and most profitable airlines. This example shows that with employee and creditor support and a practical long-term strategy, it is possible to exit Chapter 11 bankruptcy with a successful operation. 

Challenges and Costs 

Of all the different types of bankruptcy, Chapter 11 is the most complex and usually the costliest. It takes careful planning and can lead to many months, even years, of negotiation with creditors. And once the plan is agreed, there is no guarantee that it will be successful—the business could fail anyway.  

Although Chapter 11 can help an organization get back on track, filing for bankruptcy can damage the brand's reputation and reduce consumer confidence, leading to loss of revenue. The business may also be subject to higher interest rates from lenders, or higher prices from suppliers. Employees may also leave the company due to uncertainty about the future. 

One way of raising the likelihood of success with Chapter 11 is to negotiate with creditors, suppliers, and employees before filing. It might be possible to get more favorable terms or prices, and a proactive approach can also help reassure stakeholders that the matter is being handled with care. 

How Much Does Chapter 11 Cost? 

The cost varies wildly depending on the size of the business and how long the process takes, but this is a basic breakdown of the costs involved: 

• Filing fee: $1,167 

• Administrative fee: $571 

• Attorney fees: $300 – $1,500 per hour, depending on experience and location 

Add to this accountant or financial advisor fees and the costs really mount up. A simple Chapter 11 case might cost $18,000 in total, with more complex cases easily going into the millions. 

Chapter 11 for Small Businesses: Subchapter V 

Subchapter V is a streamlined type of Chapter 11 bankruptcy specifically for small businesses. The aim is the same as with the standard Chapter 11, but the process is faster, cheaper, and less complex. 

Benefits of Subchapter V 

There are several advantages to using Subchapter V over traditional Chapter 11 for small businesses, such as: 

• Lower filing and legal costs 

• No creditors’ committee or vote needed  

• The reorganization plan is approved within 90 days 

• Repayments can be spread over three to five years 

• Easier to get a cramdown from the court to overcome objections 

Subchapter V is a good option for small businesses that want to stay operational while reorganizing debts and keep control without interference from creditors. 

Eligibility and Filing under Subchapter V 

A business qualifies for Subchapter V if: 

• Its total secured and unsecured debts are under $7.5 million (as of 2024). 

• At least 50% of debts are business-related (not personal). 

• The business is engaged in commercial or business activities. 

Public companies and affiliates of large corporations are not eligible.  

The process of filing for Subchapter V is similar to that for standard Chapter 11. You’ll have to provide the same information and fill out most of the same forms. One thing to note is to check the "Subchapter V election” box on the petition form.  

If you’re not sure which type of bankruptcy is best for you or your business, a credit counselor, financial advisor, or bankruptcy attorney will be able to help. 

Other Types of Bankruptcy

Chapter 7 vs Chapter 11

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is used when a business or individual cannot continue operations due to overwhelming debt. A trustee is appointed by the bankruptcy court to sell (liquidate) the debtor’s non-exempt assets to pay off creditors, after which the debts are discharged. 

In contrast, Chapter 11 allows a business to continue running while restructuring its debts and is used when businesses think they can turn their financial situation around with the right adjustments. 

Chapter 13 vs Chapter 11

Chapter 13 bankruptcy is designed for individuals with a regular income who wish to reorganize their debts while protecting their assets. It allows the debtor to propose a repayment plan to pay off debts over three to five years. Chapter 11 bankruptcy, on the other hand, is typically used by businesses to restructure their debts while continuing to trade.  

Bankruptcy Alternatives 

Depending on the circumstances, there may be other options to explore if your business is struggling with debt. A financial advisor or attorney will be able to give you tailored advice, and the sooner you seek help, the higher the likelihood of success. 

Out of Court Workout 

This is a voluntary agreement between a debtor and their creditors to restructure debt without the need for formal bankruptcy proceedings. It’s usually less costly and time-consuming than filing for Chapter 11, and it allows the business to avoid the potential negative publicity associated with bankruptcy. This could be a workable solution if the debtor and creditors are on good terms, but it does not provide the same legal protections for either debtor or creditor as bankruptcy. 

Debt Restructuring 

Debt restructuring (link) involves negotiating new terms with creditors to extend payment deadlines, reduce the amount owed, or alter the repayment schedule. Because debt restructuring does not involve court oversight it can result in quicker resolutions and lower costs than bankruptcy. It could be a practical choice for businesses on good terms with creditors. 

Merger or Acquisition

For struggling businesses with valuable assets or very well-respected brand names, a merger or acquisition could be a viable choice. The business is sold to a stronger company, either fully or in part, and may get to continue trading under its own name. Depending on the deal, the business owners may keep or rescind control.