You have probably heard the term “Chapter 11 bankruptcy” in the news referring to large companies in financial trouble. In recent years, companies like General Motors, K-Mart, and United Airlines have filed for Chapter 11 bankruptcy. While this type of bankruptcy filing isn’t usually available to private individuals, it may be an option for some. Chapter 11 filings mostly relate to business operations. Here’s what you need to know about how to qualify for Chapter 11 bankruptcy, what it entails, and what it means for the future of a business that files for it.

How to File Chapter 11 Bankruptcy

Often called a reorganization bankruptcy, Chapter 11 bankruptcy allows a company to handle insolvency by reorganizing or discharging debt. In most cases, Chapter 11 bankruptcy filings are voluntary; a business debtor acknowledges financial trouble that will lead to the company’s ruin and seeks out debt relief from bankruptcy court. In rare cases, groups of creditors may band together to pressure an insolvent debtor into filing for Chapter 11 bankruptcy.

Entities that file for Chapter 11 bankruptcy typically include corporations, partnerships, and limited liability companies. In some cases, individuals may qualify for Chapter 11 bankruptcy if they do not qualify for Chapter 7 or Chapter 13 bankruptcy filing. However, individuals filing for bankruptcy face a more difficult process and added risk by pursuing Chapter 11 bankruptcy over Chapter 7 or Chapter 13.

Signs to Consider Chapter 11 Bankruptcy

Chapter 11 bankruptcy can offer a company the chance to reorganize debt and remain in operation, but sometimes it can simply be a stepping stone to closing down an insolvent business with as little fallout as possible. Some signs that should encourage business owners to consider Chapter 11 bankruptcy include:

  • Long-term cash flow problems. If cash flow is a perpetual problem, given that debts are continually accruing interest, you could dig yourself into a bigger hole by fighting the inevitable.
  • Risk to personal assets. In most cases, bankruptcy is a means to protect your personal assets from the effects of your unpaid debts. If you’ve co-mingled any of your personal assets with your business, filing Chapter 11 bankruptcy may be the only way to save some of what you personally own.
  • No opportunity for alternative resolution. You may be able to negotiate with some creditors, refinance existing debts, or explore debt consolidation. If there is a chance these methods could enable your company to continue and ultimately recover, you may avoid bankruptcy. If these options aren’t possible or your creditors aren’t willing to work with you, Chapter 11 bankruptcy is likely the next best option.
  • Potential to continue. In most cases, the companies most likely to file for Chapter 11 bankruptcy are those with the potential to eventually recover from the debt and continue their business operations. If current debt problems pose problems for your business’s future, filing for Chapter 11 bankruptcy sooner rather than later may help your company survive.

Chapter 11 bankruptcy filings don’t always ensure the filing company will survive. In many cases, creditors simply consider it easier to liquidate the debtor’s business and recover as much as they can. Smaller companies typically struggle the most with Chapter 11 bankruptcy filings, but larger companies can and have succeeded with their filings and remained in business.   If you are experiencing these signs, set up a consultation with bankruptcy attorney Bill F. Payne.  He can explain your options and help determine a plan of action for your business.