10 Pieces of Bankruptcy Information Everyone Should Know

Chapter 11 Bankruptcy Is Reorganization
Hostess Brands filed Chapter 11 bankruptcy for the second time in January 2012. Workers went on strike in November 2012 over proposed wage cuts and the company then announced plans to liquidate its assets and lay off the nearly 18,500 employees. Justin Sullivan/Getty Images

Chapter 11 bankruptcy is almost exclusively declared by businesses. In a Chapter 11 case, the business is so overburdened by operating debt and sluggish revenue that it can't possibly pay off existing contracts, or the salaries of its workers, without going under. By filing for Chapter 11 bankruptcy, the business doesn't have to call it quits — instead, it can call a financial "time out."

By filing for Chapter 11 bankruptcy, a struggling business buys itself some time to take a step back from its financial collapse and rethink the way it does business. As part of the Chapter 11 bankruptcy proceedings — known as a "reorganization" — the business is given 120 days to come up with a plan to restore itself to profitability and pay back creditors.

Under the reorganization plan, the company might close some of its retail stores, restructure its corporate leadership or streamline its product or service offerings. Chapter 11 bankruptcies also allow business to void existing contracts — including labor contracts with unions — and renegotiate better terms. The idea is to cut costs across the board to pay back creditors and keep the company afloat.

Once the bankruptcy court approves the reorganization plan, the company proceeds with business as usual. Sort of ... Until it emerges from Chapter 11 protection, the company must get permission from the court to buy or sell major assets, lease new property, expand or shut down business operations, or modify contracts and agreements [source: Maidman].

Recent high-profile companies to enter Chapter 11 bankruptcy include General Motors, A&P grocery stores, Hostess Brands and Eastman Kodak [source: Cauchon]. Only 10 to 15 percent of Chapter 11 cases successfully emerge from bankruptcy protection [source: Maidman]. Most end up as Chapter 7 yard sales.