What Does a Chapter 11 Bankruptcy Filing Mean for a Struggling Small Business?

••• Jupiterimages/Photos.com/Getty Images

Chapter 11 bankruptcy is a legal status that can be granted to individuals, small businesses or corporations that qualify. The goal of chapter 11 bankruptcy is a reorganization of the entity's financial status and a restructuring of debts. For a struggling small business, this can represent a second opportunity for success. A small business that is granted chapter 11 bankruptcy has a chance to get above water financially and restart operations once its finances are in order.


Chapter 11 bankruptcy is sometimes referred to as "reorganization bankruptcy." Although it can be costly and legally complex, chapter 11 is beneficial for struggling small businesses because it gives them a chance to continue operations through a process of reorganization. Initially, the business must present detailed information to the court regarding its finical standing, its obligations, its creditors and its assets. The purpose of this step is to provide the necessary information in order to move forward with the debt restructuring. The debtor, the creditor and the courts collaborate on formalizing a plan for reorganization of the business.


After the initial filing, the debtor is given a period of time, normally 120 days, to prepare a written plan to address their outstanding debts. The purpose of this plan is to obtain the best possible deal for both the creditors and the debtor. Once the plan is submitted to the court, it must be accepted at some level by creditors and must be approved by the court. Only the debtor can file the initial plan, but after this, creditors can make counter-offers or raise questions about the feasibility of the plan. Debtors often need to have experts testify on behalf of the plan. The court has the ultimate authority to either authorize the plan or reject it.

Outside Authority

Although chapter 11 bankruptcy allows the bankrupt business to continue in its daily operations if the debtor's plan is approved, new oversights are attached. Outside parties are given some degree of legal authority over the business. The U.S. Trustee's Office, an agency that operates on behalf of the Department of Justice, appoints a trustee to each chapter 11 case involving a small business. The appointed trustee is given the authority to oversee the business' operations after it files for bankruptcy. This is to evaluate whether their actions are in keeping with the plan that was previously approved. The trustee reports to the bankruptcy court.

Debtor in Possession

Under chapter 11 bankruptcy, the business owners continue to operate the business under the status of "debtor(s) in possession." This might be the primary benefit of chapter 11 bankruptcy for struggling small businesses. Ownership does not change and the business is not repossessed by creditors. Rather, the current owners continue operations under a plan to pay back creditors and emerge from bankruptcy. The debtor in possession, although their freedom is restricted by their obligation to the debt restructuring plan, has special legal rights, such as the power to void or set aside certain transactions that took place in the year before bankruptcy was declared.


About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

Photo Credits

  • Jupiterimages/Photos.com/Getty Images