Understanding Filing Chapter 11 Bankruptcy

When the New York Times reported on Radio Shack’s decision to file Chapter 11, it shocked many consumers. For over 90 years, Radio Shack has been in business, becoming a staple in the electronic world. While many of its competitors have hoped it would fail long before this, it wasn’t until a few months ago it became apparent there was no other way out, and they started the long process of filing for Chapter 11. But filing for bankruptcy isn’t as easy if you’re a smaller business owner who may have to wear multiple hats and who may not have as many people on your team. Having a general overview of the process can be helpful.


Chapter 11 bankruptcy is intended for businesses. The United States’ Courts Statistics reports that more than 7,000 businesses filed for Chapter 11 in 2014 alone. Most of them were from smaller businesses, often within the first few years of their existence. It’s appropriate in those situations where the eventual long term revenue will be higher than what the immediate liquidation value currently is.

Why File Chapter 11 Bankruptcy?

Chapter 11 bankruptcy allows businesses and individuals who own businesses to restructure their debts and obligations while discharging some. It is initiated by filing in the appropriate court. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does require that if you file for bankruptcy in a state, you will have to have lived in or done business in the state for at least two years. “Chapter 11 Filing Trends in History and Today” reports that between 33% and 25% of businesses filing under Chapter 11 are small businesses or sole proprietorships. Most wind up paying back less than 10% of debts.

General Process of Chapter 11

After declaring Chapter 11, the business must disclose all of its assets. Most of the time, this is done in list form and includes a breakdown of the debts that are sought against it. This is a time consuming part of the process as creditors can ask questions. The debtor may be held to higher accountability if the bankruptcy court determines there has been

  • gross mismanagement
  • fraud (remember that it could be considered fraud if you realize you are going to have to file for bankruptcy and start running up your credit so that you have more to disperse)

During this time, the business continues to run, but the owner will not be in charge. The bankruptcy court will instead appoint a trustee who will handle the decisions.

Standard business operations will continue throughout the bankruptcy process. However, nothing out of the ordinary can occur. Major expansions are also forbidden, even if they would fall within the natural course. While this continues, the business and creditors begin negotiations to determine the best payment solution. If the business has stockholders, they can also participate in a separate committee.

Eventually, the debtor crafts a strategy to reorganize and repay what debts he can. The plan must be submitted to the creditors, stockholders, and court. In some cases, the court will approve the plan even if the stockholders refuse it. Reuters states that while the majority of these plans are approved, stockholders are typically dissatisfied with the results.

Chapter 11 bankruptcy is intended for businesses large and small as well as individuals have issues with their current debts but need to reorganize so that they can eventually pay off their creditors. The restructuring process is time consuming, and it is important that business owners are honest about this. But it can provide relief and allow the business to repay many creditors while absolving certain unsecured debts.


While you can do this on your own, it’s best to have a professional on hand. Consider talking with an attorney at Van Horn Law Group to guide you out of the mess.

About Chad Van Horn

Chad T. Van Horn, Esq. is a South Florida business leader and founding partner attorney of Van Horn Law Group, P.A. Through a combination of dedicated philanthropy, spirited entrepreneurship and legal expertise, he applies his resources and network to helping people. Learn more about Chad Van Horn

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Chad Van Horn

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