When a person or a business has significant debts to pay but has a plan for financial recovery, they can file for Chapter 11 bankruptcy. This typically occurs in states of temporary financial distress where it is still possible to recover and return to a state of profitability. Entities that file Chapter 11 can avoid liquidation and continue operating in a bid to pay back their debts.
Which entities are eligible?
Almost any business can file Chapter 11, a reorganization process that exists to help entities restructure debts and operations without shutting down. Many entities are eligible to file, including:
- Individuals: People whose debts exceed the limit of Chapter 13 bankruptcy
- Businesses: Almost all types of business structure utilize Chapter 11, including corporations, partnerships and LLCs
- Sole proprietorships: Small business owners whose business and personal finances are legally intertwined
Though technically individuals are eligible, it is rare for them to file bankruptcy under Chapter 11. Instead, people who go bankrupt often file under Chapter 13.
Which entities are ineligible?
Not all businesses or individuals can file for Chapter 11 bankruptcy. Bankruptcy is instead filed under other chapters. Entities such as stockbrokers, government agencies, non-business trusts and insurance companies are all ineligible.
Some businesses and individuals otherwise eligible for Chapter 11 may be barred from doing so under certain circumstances. These include entities that engage in fraud and demonstrate an inability to comply with court orders.
The significance of Chapter 11 bankruptcy
Filing for Chapter 11 is among the most accessible ways to restructure debts and operations without permanently closing down a business. The ability to carry out a reorganization plan by restructuring debts is what allows businesses to get a second wind and recover, as opposed to liquidating their assets and shutting down for good.