Recently, Harry & David (the mail-order food company) declared for Chapter 11 Bankruptcy protection. They are far from the first company to face tough times and declare bankruptcy, but what exactly is Chapter 11 Bankruptcy and how is it different from Chapter 7 or 13?

What Is Chapter 11 Bankruptcy?

Unlike Chapter 7 and Chapter 13 bankruptcy, Chapter 11 bankruptcy is generally used to reorganize the debts or commitments of a business.  Because a Chapter 11 bankruptcy allows you to reorganize your debts to pay your creditors over time it is often referred to as a “reorganization” bankruptcy.  Additionally, under a Chapter 7 bankruptcy, a company must cease doing business, while a Chapter 11 bankruptcy allows the company to continue to operate so long as the company has more value as an ongoing concern rather than being sold off in parts.

The Chapter 11 process begins with a petition to the bankruptcy court (either by the company or by a creditor).  From there the court will look at the assets and liabilities of the company, its current income and expenditures, it’s list of contracts and unexpired leases and a statement of financial affairs.  The court will designate the company as being a “debtor in possession” and allows the company to try to restructure it’s company by finding new financing and loans.  The way a company can get these new loans is because the company, after filing for Chapter 11, can give lenders first priority on the business’ earnings. 

Why Do A Chapter 11 Bankruptcy?

There are several reasons a company may consider filing for Chapter 11 bankruptcy protection.  These include the ability of the company to continue to stay in possession of most of its facilities, property and people.  Additionally, a company may be able to cancel or reject certain contracts without having to pay large penalties.  Furthermore, a company can get better financing or loans by giving priority to those new lenders.