What is a Chapter 11 Bankruptcy?

The news that Back Yard Burgers is closing eight of its Arkansas locations as part of its Chapter 11 bankruptcy filing hit some burger fans pretty hard. But what is Chapter 11 bankruptcy and how does it work?

A Chapter 11 bankruptcy usually results in a reorganization of a struggling company’s assets and debts in such a way that the company can stay in business. When a company has value as an ongoing concern but cannot meet its debts, it is not in the best interests of creditors and shareholders to just shut down the business and liquidate all of its assets. Instead, by working together and renegotiating the terms of their agreements, the company can continue to operate and the creditors can recoup some of their investment. The shareholders and creditors of Back Yard Burgers hope that, through this process, they can recover more than what they would get if the business was shuttered and its assets sold piecemeal.

In some Chapter 11 cases, like in the Back Yard Burgers case, the owners of the company are allowed to continue operating the business. In others, a trustee is appointed to run the business. When a bankruptcy petition is filed it acts as an automatic stay, which prevents creditors from taking any action to collect on debts that arose before the company filed its bankruptcy petition. The company or the trustee can even force a counterparty to continue doing business with the debtor company and can renounce some of its contractual obligations, like the high-rate leases Back Yard Burgers was saddled with.

During the bankruptcy, a plan describing how the company intends to pay its creditors and continue operating the business is proposed and voted on by all the creditors. Even if some creditors oppose the plan, it can be forced upon them, in a move aptly called a “cramdown.” Once the plan is confirmed by the court, some of the debts are discharged (which means the debtor company never has to pay them off).

Bankruptcy may be the saving grace for a business that has value but has run into financial trouble. However, it’s important to note that filing for bankruptcy and operating a business throughout the Chapter 11 process is a very complicated endeavor. If you are considering filing for bankruptcy or want to talk about your options, please contact us to set up an appointment.