What Does It Mean When a Company Files for Chapter 11?

Chapter 11
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There are a whole lot of phrases that we hear regularly, so regularly in fact that admitting to the fact that we don't know what they mean doesn't even feel like a real option. One of those phrases is Chapter 11; a term we hear most often when someone "files for Chapter 11," and most recently this week when children's retailer Gymboree filed for Chapter 11 bankruptcy. But what exactly does that mean?

Basically Chapter 11 is a bankruptcy code that allows for financial reorganization. In other words, a company or a person who is in debt is able to file for Chapter 11, retain some of their assets, and reorganize by using the sale of other assets and new revenue sources in order to pay down debt and refinance. Chapter 11 is available to both individuals and businesses.

The pluses of Chapter 11: It gives people time to reorganize and more time to file a plan. The cons: It's more expensive and takes longer to see through than other forms of bankruptcy.

To return to the Gymboree example, basically by filing for Chapter 11 what they're doing is giving themselves time to reorganize. As CNBC explained, "The Chapter 11 filing should reduce Gymboree's debts by more than $900 million ... and it will shutter some 375 stores."

So when it comes to understanding Chapter 11 at it's simplest level, what it basically means is that a company is in the hole but not yet ready to shut the doors. By enacting Chapter 11 the company is hopefully able to figure out a new, solvent way to move forward.