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What is chapter 11 bankruptcy?

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Quick Answer

Chapter 11 bankruptcy allows a debtor to reorganize assets and repay debt over time. This type of bankruptcy is often used by corporations or partnerships, although individuals may also file for it. Chapter 11 bankruptcy allows the company to maintain its assets and continue doing business throughout the bankruptcy process, rather than selling off assets to repay debt immediately.

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Full Answer

Chapter 11 bankruptcy is one of three common types of bankruptcy in the United States. It is used primarily by large corporations, in part because individuals and small businesses are rarely able to pay the extensive legal fees associated with it. The other two types of bankruptcy are chapters 7 and 13, which are used by individuals and small businesses.

When chapter 11 bankruptcy is declared, an automatic stay prevents creditors from foreclosing on property until the bankruptcy process is completed. During the bankruptcy proceedings, the company works with creditors, stockholders and the court to negotiate a repayment plan. The courts must approve a repayment plan, through which the company repays creditors over a period of months or years. Occasionally, some of the debt is forgiven as part of the repayment plan. If a business does not follow through on the repayment plan, the bankruptcy may be converted to chapter 7, and the company's assets can be sold immediately to repay the debt in full.

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