When many people hear “Chapter 11,” they think of large corporations reorganizing massive debt. However, Chapter 11 is also a viable path for small businesses, sole proprietors, and individuals who need a structured way to reorganize finances while continuing operations. Although it is more complex and costly than other bankruptcy chapters, it can be a powerful tool when liquidation or a standard repayment plan is not feasible.

Why Choose Chapter 11 Bankruptcy?

Chapter 11 is fundamentally about reorganization, not liquidation. The debtor typically retains control of the business and assets—operating as a debtor in possession—and proposes a plan to restructure debt over time.

Small businesses or individuals often consider Chapter 11 when:

• They need to continue operating rather than shutting down.
• Their debt exceeds Chapter 13 limits.
• Their finances are too complex for Chapter 13.
• Business and personal finances are intertwined.
• They need to modify secured debt in ways not available in Chapter 7 or Chapter 13.
• They require a customized repayment structure.

Chapter 11 provides essential breathing room: it stabilizes operations and stops creditor pressure.

How Chapter 11 Works for Small Businesses

Small business owners—such as restaurants, contractors, retail shops, and clinics—turn to Chapter 11 when the business is viable but burdened by debt, rent, taxes, lawsuits, or lease disputes.

Key Features of Small Business Chapter 11

Debtor in Possession

Management stays in control and continues running the business, subject to oversight.

Ability to Restructure Obligations

Chapter 11 can restructure:

• Leases
• Secured loans
• Vendor debt
• Tax liabilities
• Personal guarantees

Automatic Stay

Immediately upon filing, Chapter 11 stops:

• Collections
• Lawsuits
• Foreclosures
• Garnishments

Chapter 11 for Individuals

Individuals file Chapter 11 when debt exceeds Chapter 13 limits or when finances are too complex for other chapters.

Common types of individual filers include:

• Real estate investors with multiple properties
• Business owners with personal guarantees
• Professionals with significant tax obligations
• High-income individuals needing a customized structure

Chapter 11 offers flexibility in restructuring secured loans, managing investment properties, and resolving business-related debt.

Important Considerations

While streamlined procedures exist for certain small debtors, Chapter 11 still includes:

• Strict deadlines
• Court oversight
• Extensive reporting requirements

It is not a quick or simple process—but it is a strategic tool for reorganizing and rebuilding.

The Chapter 11 Process

1. Filing the petition
2. Operating as a debtor in possession
3. Preparing required disclosures
4. Developing a reorganization plan
5. Negotiating with creditors
6. Court confirmation of the plan
7. Implementing the confirmed plan

Common Situations Where Chapter 11 Helps

Chapter 11 is often beneficial for:

• Restaurants or retail businesses with overdue rent
• Contractors facing judgments but maintaining active contracts
• Medical practices struggling with equipment loans
• Landlords needing to restructure property debt
• Individuals with business guarantees or complex financial obligations

Experience You Can Trust

For more than 30 years, I have represented individuals, small businesses, investors, and consumers in Chapter 11 and consumer bankruptcy cases. I understand the stress, uncertainty, and financial pressure that clients face when considering bankruptcy, and I take pride in offering practical, compassionate, and strategic guidance tailored to each situation.

Whether you are a business owner trying to save your company, an individual with complex finances, or someone simply looking for a path forward, you do not have to navigate these challenges alone.

Call Me With Your Questions

If you are considering Chapter 11 or want to better understand your options, I encourage you to call me directly. I am always happy to speak with prospective clients, answer your questions, and explain how these laws may apply to your situation. There is no substitute for personal guidance from an attorney who has handled Chapter 11 cases for decades.

Contact Rosenblatt Law anytime to schedule a consultation and take the next step toward financial stability and a fresh start.

Businesses must follow both federal bankruptcy laws and any applicable state regulations.

Preparing for the filing

Before filing, a business must assess its financial situation. This includes reviewing outstanding debts, assets, and revenue streams. A business should also determine whether Chapter 11 is the best option compared to alternatives like Chapter 7 liquidation. Once the business decides, financial records must be prepared for submission to the bankruptcy court.

Filing the petition

A Chapter 11 case begins with filing a petition in the appropriate U.S. Bankruptcy Court. Businesses can file voluntarily, or creditors can force them into bankruptcy through an involuntary petition. Along with the petition, the debtor must submit schedules of assets, liabilities, income, and expenses, as well as a statement of financial affairs.

Operating as a debtor-in-possession

After filing, the business continues operating as a “debtor-in-possession.” This means ownership remains with the existing management, but the court oversees major financial decisions. In Maryland, businesses must comply with both federal bankruptcy rules and state business regulations. Any significant asset sales, lease agreements, or loans require court approval.

Developing a reorganization plan

A key part of Chapter 11 is creating a plan to restructure debts. This plan outlines how the business will repay creditors over time. Creditors can vote on the plan, and the court must confirm it before implementation. Maryland businesses must ensure compliance with both the U.S. Bankruptcy Code and any applicable state-specific financial rules.

Completing the reorganization

Once the court confirms the plan, the business must follow the outlined repayment structure. Regular reports must be submitted to the court to demonstrate compliance. If the business successfully meets its obligations, it can exit Chapter 11 and continue operating without court oversight.

Treatment of franchise agreements during Chapter 11

When a franchisee files for Chapter 11, the bankruptcy court decides whether the franchise agreement remains in effect. The franchisee can either assume or reject the agreement. Assuming the agreement allows the franchisee to keep operating under its current terms, but it must also fulfill any overdue obligations. Rejecting the agreement ends the business relationship, which could lead to legal disputes or liabilities.

Impact on franchisor rights

Chapter 11 bankruptcy impacts franchisors by limiting their ability to terminate agreements immediately. The bankruptcy court must approve any termination attempt. Franchisors must also deal with delays in receiving payments and might need to negotiate with the franchisee regarding back payments or contract modifications. Despite these challenges, franchisors can still protect their rights if the franchisee fails to fulfill agreed obligations.

Renegotiation opportunities

Chapter 11 bankruptcy may offer an opportunity to renegotiate franchise agreements. Franchisees might seek to alter payment schedules, reduce fees, or adjust other contract terms to make the agreement more sustainable. Franchisors often agree to modifications to help the franchisee stay in business, as losing a franchise location can harm the brand and result in lost revenue.

Risks and considerations for both parties

Chapter 11 presents risks for both franchisees and franchisors. Franchisees may struggle to meet the obligations required to assume an agreement. Franchisors face uncertainty over payments and whether the franchisee can successfully reorganize. Both parties should carefully consider their options and work together to find a solution that supports long-term success.

Navigating Chapter 11 requires careful planning and open communication. Both franchisors and franchisees benefit from understanding their rights and responsibilities, ensuring a good outcome for all involved.

For entrepreneurs in Maryland, understanding how Chapter 11 bankruptcy impacts commercial leases is important for making informed decisions during the restructuring process.

What happens when you file for Chapter 11 bankruptcy?

When a business files for Chapter 11 bankruptcy, an automatic stay immediately goes into effect. This stay prevents creditors, including landlords, from taking any action to collect debts or evict the business from its commercial property. The automatic stay allows the business to continue its operations without the threat of losing its location. However, this protection is not permanent. The business must eventually address its commercial lease as part of the bankruptcy proceedings.

How does Chapter 11 affect my lease?

Under Chapter 11, businesses have the option to either assume or reject their commercial leases. If the business assumes the lease, it agrees to continue fulfilling the terms of the lease, including paying rent. The business may also negotiate new terms with the landlord to better align with the reorganization plan. This can provide the business with some flexibility to adjust lease terms in a way that supports its financial recovery.

If the business decides to reject the lease, it essentially breaks the contract. The landlord can then file a claim for damages resulting from the breach. The business will need to find a new location or determine how to proceed without the leased space. This decision can significantly impact the business’s operations, so it requires careful consideration.

Chapter 11 bankruptcy presents the opportunity to continue operating your business, but reorganizing your assets can make it difficult to afford your lease afterward. While filing for Chapter 11 does not necessarily affect your commercial lease, it is important to consider whether you should assume or reject the lease in the long run.

While you may anticipate that you can create your own plan, there will be other parties who could have the opportunity to compose competing plans to yours.

The debtor

The debtor, namely the business that filed for bankruptcy, has the first opportunity to submit a reorganization plan. You have 120 days from the date of your business bankruptcy filing to propose a plan. During this period, no other party can file a competing plan. Also, the court may extend this exclusivity period if you show good cause.

Creditors

If you fail to file a plan within the exclusivity period or if the court terminates the period, the creditors’ committee can file a reorganization plan. This committee represents the interests of unsecured creditors and typically includes the largest unsecured creditors of the debtor.

Individual creditors may also file plans after your exclusivity period ends. These creditors can be secured or unsecured and may have different priorities in the bankruptcy process.

The bankruptcy trustee

As part of your bankruptcy case, you will be assigned a trustee. Bankruptcy trustees oversee bankruptcy cases. Typically, a bankruptcy trustee does not file a reorganization plan. However, they may do so if the situation warrants it, such as when no other party has filed a viable plan.

Shareholders

In some cases, shareholders of the debtor company may file a reorganization plan. This usually occurs in larger bankruptcy cases where shareholders believe they can preserve some value in their business, so your company may not have this issue if you own a small business.

Given that other parties can submit reorganization plans, you should start on yours as early as possible. Your plan should establish itself as one that is feasible to carry out, is fair to creditors, and complies with bankruptcy laws. This can help ward off competing plans and make your Chapter 11 bankruptcy a success.

The United States Bankruptcy Code provides petitioners with 120 days to create a reorganization plan. The affected creditors form a committee and vote on the plan’s approval. Until the creditors approve the reorganization plan, a business exists as a “debtor in possession,” as noted by Cornell Law School’s Legal Information Institute.

A debtor in possession’s rights and responsibilities

After opening a Chapter 11 case, the court establishes a debtor’s bankruptcy estate, which consists of properties governed by a contract. As a debtor in possession, borrowers hold assets on behalf of their creditors.

According to the U.S. Department of Justice, a debtor owes a fiduciary duty to creditors rather than business owners or shareholders. A debtor must continue operating and using its creditors’ assets to generate revenue. The goal is to repay those creditor obligations as approved under the reorganization plan.

Negotiations and vote approvals before filing

The Internal Revenue Service’s website notes that debtors may negotiate with their largest secured and unsecured creditors before filing their cases. By preparing for their bankruptcies in advance, debtors may obtain the votes necessary to confirm their reorganization plans. Once approved, the plan becomes a binding contract.

Chapter 11 bankruptcy offers businesses a means to overcome temporary financial struggles. By reorganizing its debts, a business may keep its assets after negotiating a workable payment arrangement.

However, if you want the bankruptcy process to go smoothly, you must be alert to potential problems. Here are five mistakes you must avoid.

1. Failing to list all creditors

The law stipulates that you list all your creditors when you file for bankruptcy. Double-check to make sure you have not missed one. If you fail to list a creditor, your trustee may not discharge the associated debt.

2. Repaying family

If you owe money to someone in your family, do not consider repaying before you file for bankruptcy. Otherwise, your trustee may consider that a “preferential” payment and disallow it. As a result, your family member may have to transfer your payment to the trustee.

3. Going on one last spending spree

Going on one last big shopping trip or making a big purchase will not please the court. If you assume additional debt within 90 days of filing bankruptcy, the court may deny your petition.

4. Hiding assets

Do not fail to declare all your assets, such as the additional checking account you set up in your own name at another bank. The court could find you guilty of bankruptcy fraud and you could face heavy fines and time behind bars.

5. Delaying your filing

Once you decide to declare bankruptcy, do not delay since your debts will only continue to pile up. Rely on legal guidance to help you better understand the bankruptcy process, ensure you make no missteps and prepare you for a brighter, debt-free future.

According to Dave Ramsey, there are some signs that may forecast a bankruptcy in your future. 

You have a lot of debt

If you often buy things on credit or if you know your credit card debt is too high, this is a good indicator that you could be heading for trouble. Once your credit card balances get so high, it can be next to impossible to ever pay them off, and if you cannot stop yourself from using credit, it is often a slippery slope to falling behind on payments and facing collection action. 

You do not use a budget

Good financial health requires using a budget so that you know exactly what you have coming and going out. A budget lets you identify problems early so that you can handle them quickly. If you simply spend money without regard to your obligations, it will not take long for you to experience financial difficulties. 

You do not have an emergency fund

Nobody knows what the future holds. Sometimes, things happen that you could never imagine that will cause you financial trouble. If you do not have an emergency fund in place to take care of your needs should you lose your job or have a reduction in income, then you are just one step away from a situation where you could have to file for bankruptcy protection. 

Sometimes, debt collectors are forceful. But the law prohibits them from harassing people they collect from. Is your debt collector harassing you? 

What are examples of harassment? 

The Consumer Financial Protection Bureau describes harassment by debt collectors. The Fair Debt Collection Practices Act (FDCPA) ensures that debt collectors cannot harass you. Harassment in this scenario is anything that abuses, oppresses or harasses you. Some examples include: 

• Threatening to harm you  
• Threats of violent acts 
• Profane or obscene language 
• Publishing public blacklists of people who do not repay debts 
• Repeated phone calls made with the intention to harass, threaten or abuse 

Is harassment always physical? 

It often surprises people that so many things are “harassment”. But harassment is not only the act of physically harming or threatening someone. Harassment is often much more subtle than that. 

For example, let us say that a debt collector parks outside of your house. They do not do anything. But the intent of parking there is to make you feel anxious, fearful or threatened. They are not on your property and they are not doing anything against you. But this is still considered harassment. You could argue that they made a threat of harm by forcing you and your family to feel watched or menaced. 

There are many ways to prevent creditors from harassing you. Filing for bankruptcy is one of them. As soon as you file for bankruptcy, all creditors and collection agencies must leave you alone by law. 

In the case of the popular shoe retailer Payless, it appears to have been both. Many well-established retailers have lost huge portions of their customer bases in recent years as online retail continues to grow. While other companies in their space have been able to survive by creating strong online identities themselves, Payless has failed to keep up. That fact, coupled with supply chain issues and massive internal computer network failures in 2017 and 2018 that forced the company to lose millions by selling excess inventory at below-market prices, has left the once-thriving retailer in a near-fatal financial position. That position was detailed in a recent Chapter 11 filing, in which store representatives announced the companies intention to close all of its stores in the U.S. and Canada. The company’s international stores will remain open. 

While Chapter 11 may offer some companies the chance to emerge from bankruptcy relatively unscathed, in other cases it may be the only way for a business to avoid massive financial losses to both itself and its creditors. No matter which outcome a company hopes for, its management may be wise to first seek the advice of bankruptcy attorneys before taking such a massive step.