The Chapter 11 Process
Chapter 11 lets a company keep operating while a bankruptcy court sorts out who gets paid, in what order, and with what pieces of the reorganized business. It is a negotiation with a deadline, not a liquidation.
A company that cannot pay its debts has two very different paths. Chapter 7 shuts the doors, sells everything, and hands out the cash — a liquidation. Chapter 11 does something stranger: the company keeps running, keeps its logo on the trucks, keeps paying employees, while a bankruptcy court referees a fight among the people it owes money to over how to carve up what is left. Airlines, retailers and car makers have all gone through Chapter 11 and come out the other side still operating.
Chapter 11 is a court-supervised negotiation, not a shutdown. The business keeps running as a "debtor in possession" while creditors argue over a reorganization plan that says who gets paid, how much, and in what form — cash, new debt, or stock in the reorganized company.
Why keep the company alive at all
A going concern is usually worth more than a pile of scrapped assets. An airline's planes and gates sold off piecemeal raise less than the airline sold as a running business with routes, crews and a brand. Chapter 11 exists to capture that extra value: freeze the fight over who gets paid, keep the operation intact, and let a court-supervised process figure out the split.
The moment a company files, an automatic stay kicks in. Every lawsuit, foreclosure and collection call against the company stops immediately. Creditors cannot jump the line by seizing assets on their own; everyone has to wait for the process.
The order of the line
Bankruptcy does not divide the pie equally — it pays out in a strict pecking order called the absolute priority rule. Each class must be paid in full before the next one below it sees a cent, unless it agrees to less.
| Priority | Claimant | Typical recovery |
|---|---|---|
| 1 | Administrative claims (fees to run the case, DIP lenders) | Paid in full, first |
| 2 | Secured creditors (backed by specific collateral) | Often close to full, up to collateral value |
| 3 | Unsecured creditors (bondholders, suppliers, landlords) | Highly variable — cents on the dollar to full |
| 4 | Preferred stockholders | Rarely anything |
| 5 | Common stockholders | Usually wiped out |
A company that files for Chapter 11 often has equity worth close to zero the moment the filing hits the news, because the market immediately re-prices for the likelihood that unsecured creditors — let alone shareholders — will not be made whole.
Keeping the lights on: DIP financing
A company in Chapter 11 still needs cash for payroll, suppliers and rent. Debtor-in-possession (DIP) financing is new money lent to the company during the case, and it jumps to the very front of the repayment line — ahead of even the old secured lenders — because nobody would lend into a bankrupt company otherwise. Existing lenders often provide the DIP loan themselves, since it is their best shot at protecting the value of what they are already owed.
From filing to plan
A Chapter 11 case moves through a rough sequence, though the timeline can run from months to years depending on complexity:
- Filing and stay. The company files a petition, the automatic stay freezes creditor actions, and DIP financing is arranged if needed.
- Negotiation. Creditor committees form — one for secured lenders, often one for unsecured bondholders and suppliers — and negotiate with the company over how the business will be split up.
- Plan of reorganization. The company files a plan describing exactly what each class of claim receives: cash, new bonds, or equity in the reorganized company. A disclosure statement explains the plan to creditors who must then vote on it.
- Confirmation. If enough of each class votes yes, the judge "confirms" the plan and it becomes binding on everyone, including creditors who voted no. This is called a "cramdown" when a dissenting class is forced to accept a plan anyway, provided the absolute priority rule is respected.
- Emergence. Old equity is typically cancelled, new equity is issued to former bondholders, and the company exits bankruptcy as a private or newly listed public company.
Watch what happens to the equity ticker: many companies keep trading through Chapter 11 with a "Q" appended to the symbol, a public signal that the shares are almost certainly headed to zero once the plan confirms.
Where this matters for investors
Distressed debt investors read Chapter 11 filings the way equity investors read earnings calls — the recovery for each class of bonds depends entirely on where it sits in the priority stack and what the reorganized business is actually worth. A bond trading at 20 cents on the dollar might be a bargain if the business is healthy and the debt load was simply too large, or a value trap if the underlying business is actually worth less than the secured debt ahead of it.
"The company filed for bankruptcy" does not tell you who loses money. Secured creditors and DIP lenders are often made whole or close to it; the pain concentrates in unsecured bonds and, almost always, in the old common stock. Read the capital structure before assuming everyone above the equity is wiped out too.
Related concepts
Practice in interviews
Further reading
- Moyer, Distressed Debt Analysis (ch. 2-3)
- US Bankruptcy Code, Title 11, Chapter 11