Chapter 11 Bankruptcy

It is one of the six forms of bankruptcy that deals with restructuring a company's liabilities (i.e., debts and obligations).

Chapter 11 Bankruptcy, commonly known as "reorganization" bankruptcy, is one of the six forms of bankruptcy that deals with restructuring a company's liabilities (i.e., debts and obligations).

Remember the basic accounting equation, 

Assets = Liabilities + Shareholders' Equity.


  • Assets are resources the company owns
  • liabilities are what the company owes to external parties, such as lenders and suppliers, and 
  • equity can be associated with the owners' claim on a company's assets.

In other words, equity is what would be returned to the shareholders if the company was liquidated and all debts were paid off.


Bankruptcy has to do with a company (the debtor) not being able to pay its obligations/debt (i.e., its liabilities) to its creditors (the people or organization that the company owes). 

Chapter 11 bankruptcy is typically quite useful because companies may recover profitability AFTER reorganization.

When most people think of bankruptcy, they tend to think solely about the liquidation type (Chapter 7)... however, in this article, we plan on touching on all types of bankruptcy. 

Chapter 11 & The Other Types of Bankruptcies

While this article aims to understand Chapter 11 Bankruptcy best, we think you should be somewhat familiar with five other forms of bankruptcy in the United States.

chapter simply refers to where the U.S. Bankruptcy code is found.

Suppose you plan on pursuing a career in finance. In that case, the six different types of bankruptcies that you SHOULD ABSOLUTELY be familiar with are as follows:

1. Chapter 7 – "Liquidation"

Chapter 7 is the most common plan of action for bankruptcy that an individual or company can take.

This type of bankruptcy refers to liquidating or selling assets to gain cash to pay off the creditors (i.e., the people we owe money to).

Under Chapter 7, the company will have to stop all business operations and inevitably "go out of business."

The court has to decide that you / the company does not generate enough money to pay back the existing debt.

The bottom line is that Chapter 7 is the last resort in that there is no chance for the business to survive in ANY shape or form.

As a pure and full liquidation, Chapter 7 distributes cash by absolute priority (i.e., creditors than shareholders) via the U.S. Trustee.

Complete liquidation under Chapter 7 is preferable when there is little stable cash flow, and there will likely be capital infusions (more cash pumped into the business) in the future.

Some notable instances of Chapter 7 bankruptcy are CircuitCity, Aloha Airlines, and MC Sports.

During Chapter 7, the "going out of business" signs are quite common.

2. Chapter 13 – "Repayment Plan"

Corporations are unlikely to utilize Chapter 13… this type of bankruptcy is more used for individuals.

Debtors are to repay creditors within 3 to 5 years of the agreed time period and contractual period.

Chapter 13 has a lot to do with a monthly payment plan of debt, and typically the debtors have around 3 to 5 years to pay back any outstanding debt, liabilities, or obligations that creditors may have lended.

Unlike Chapter 7, you'll be able to keep your PERSONAL assets… for example, houses can be saved from foreclosure.

This monthly payment depends on the personal income that you take home each month. 

3. Chapter 9 – "Municipalities"

Municipalities are cities, towns, or something of that nature that a mayor and the town council typically govern.

Chapter 9 bankruptcy deals with municipalities (again, villages, towns, cities, etc.) that are in trouble with creditors, taking on too much debt and not being able to pay it back collectively.

Three of the most common methods to reorganize a municipality's debts include the following: 

  • longer debt maturities, 
  • access to a new and improved loan, and 
  • refinancing the debt by adding an interest reduction.

There is no liquidation of assets in Chapter 9.

4. Chapter 12 – "Family Farmers"

Chapter 12 is a unique option for bankruptcy.

It is utilized only for small fishing or farming companies and is extremely similar to Chapter 13.

The main difference is that Chapter 12 is a bit more flexible in contractual terms and has higher debt limits than Chapter 13.

5. Chapter 11 – "Large Reorganization"

Chapter 11, the main discussion point of this article, is typically preferred in hopes of getting the business in the green zone – the zone where the business is profitable.

Under Chapter 11, a business/company will undergo restructuring or reorganization.

The investment bank advises the company on a restructuring plan, and the company itself will come up with a plan to pay back the debt.

Under all circumstances in Chapter 11, the company under distress will seek the best of the best options for recovery.

The four major steps in Chapter 11 are restructuring the debtor's operations by asset sales and contract assumptions/rejections.

Important documents used when Chapter 11 is filed 

  • monthly cash reports, 
  • court docket (filing with the bankruptcy court), 
  • listing of professional fee applications, 
  • DIP proposals, 
  • a list of all creditors, and 
  • reasons why the debtor (i.e., the company) is seeking relief under Chapter 11.

This is followed by the development and execution of a proposed plan (or POR), a vote on the POR by interest holders, and finally, confirmation of the POR by the bankruptcy court.

6. Chapter 15 – "Foreign Cases"

This type of bankruptcy deals with issues, debtors, and creditors on an international scale.

As one of the newer forms of bankruptcy, Chapter 15 has been in practice since 2005.

This chapter allows foreign debtors to file for bankruptcy under U.S. laws. 

Although it is new, there are very few instances in which a company may utilize Chapter 15.

DIP Financing

Debtor-in-Possession (DIP) is what the company that has filed a petition for bankruptcy is called.

For instance, when a company files for Chapter 11, they gain an additional title of DIP.

DIP financing is a unique type of financing that is only available to those who have filed and granted extreme priority over all existing elements of the capital structure.

As a generally secure method, there is a lot of collateral in DIP financing – things that act as repayment if the payment cannot be repaid and is considered "safe" by lenders because it is subject to stricter terms than other capital financing methods.

Companies prefer to file for Chapter 11 solely based on the fact that they get access to DIP financing.

DIP allows companies to raise capital to fund operations as their bankruptcy runs its course.


Philosophically, DIP financing gives distressed companies a better chance to emerge from Chapter 11.

Additionally, if a company can utilize DIP financing, it signals to vendors, suppliers, creditors, loaners, and customers that the company will be able to make payments for goods and services during its restructuring.

Restructuring Investment Banking

Restructuring (Rx) – besides being misunderstood – is by far the most niche sub-sector of investment banking.  

Restructuring investment banking is sought after by many undergrads around the U.S. because of the blend of psychology, law, as well as finance that comes together during a deal.

Rx bankers primarily deal with Chapter 11 Bankruptcy as they are to reorganize/restructure a company's debt.

Rx bankers will be helping a company restructure its capital structure to ensure that it can succeed "post-bankruptcy."

Creative solutions are necessary to ensure that the company's best long-term outlook can be achieved most easily and cost-effectively as possible.

For instance, the bankers may propose that the company exchanges notes payable with security with a longer duration.


We also want to point out that traditional bulge bracket investment banks (e.g., Goldman Sachs, Morgan Stanley, and J.P. Morgan) do not have traditional restructuring practices. 

Instead, boutique investment banks mainly handle restructuring in the business world.

The major players in Rx are Evercore, Moelis, Lazard, PJT, and Houlihan Lokey.

The reason that bulge bracket banks cannot deal with these Rx issues is because of conflicting interests.

Let's say that JPM helped a company issue $500 million of debt, which now needs a restructuring.

Because JPM made the company get into a pigeonhole, to begin with, the company in trouble is likely to want "unconflicted" advice.

The bottom line is that restructuring investment bankers are in the business of ensuring that the company survives in the short term and can thrive under some new capital structure. 

Characteristics of a Distressed Company

One of the most important questions that will come up in Rx banking interviews will be something along the lines of the following: "Does a distressed company always file for bankruptcy?".

The answer to this question is NO!  

This is the type of question that very simply finds out who knows what Rx is all about.

While Chapter 11 is something that you, D.O., end up addressing as an Rx banker, much of what you'll be doing in Rx will be to prevent companies from filing for Chapter 11 in the first place! 

As you likely already know, the objective of any type of restructuring is to ensure that the distressed company will not have to restructure for several years down the line.

Furthermore, while every company is different, there are a 

With all that being said, there are a few general characteristics of a distressed company that we think you should be aware of:

Limited liquidity, decreasing equity price (if public), high leverage ratios (the company is taking on more debt than it can handle and is above the industry average), and downgrades on bonds and other forms of credit.

5 Famous Bankrupt Companies that "Came Back."

While most companies that undergo Chapter 11 fail in the end, a select few companies recover from the rather disorganized state of business.

As you already know, Chapter 11 is quite appealing to many companies because it means that they get to continue operations and stay in business while the investment bank and court help them reorganize/restructure their debts as well as obligations.

Below are five examples of companies recovering from the dreaded abyss of bankruptcy

  1. In 1997, Apple was on the verge of going bankrupt and was saved by a long-time rival company, Microsoft, when they saved Apple $150 million.
  2. After 2008, General Motors, or "G.M." for short, filed for bankruptcy and was bailed out by the U.S. government.
  3. Famous pizza shop business, Sbarro, filed for Chapter 11 twice – once in 2011 and again in 2014.
  4. Amusement park operator, Six Flags also filed for Chapter after being unable to pay back the $2.7 billion debt (and counting) to its creditors.
  5. Finally, Marvel Entertainment filed for bankruptcy in 1996. This is surprising as you're probably familiar with Marvel dominating the movie and film industry with blockbusters such as Spiderman and The Avengers
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Key Takeaways
  • Chapter 11 bankruptcy, or "reorganization" bankruptcy, is one of the 6 forms of bankruptcy you may encounter when learning more and more about the finance world.
  • The 6 types of bankruptcies you will likely encounter are Chapters 7, 11, 9, 13,12, and 15.
  • Upon filing for bankruptcy, a company (i.e., the debtor) will gain the title of DIP or debtor-in-possession.
  • Restructuring (Rx) investment banking is a different ball game compared to traditional M&A investment banking.
  • Rx is so much different than traditional M&A because you are trying to "fix" a company rather than "add" to a company.
  • Many companies HAVE recovered from financial distress!
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Researched and authored by Joshua Tobias | LinkedIn

Reviewed & Edited by Ankit SinhaLinkedIn

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