Restaurant operations suffered during the COVID-19 pandemic and recent economic conditions have accelerated failures and bankruptcy filings. Six types of bankruptcy exist under the U.S. Bankruptcy Code, but restaurants most commonly use chapter 7 or chapter 11. Chapter 7 involves liquidation, permanent closure, and asset sales to pay creditors. Chapter 11 permits reorganization while remaining open, allowing debt restructuring and renegotiation of contracts and leases with creditors and the court. Chapter 11 is more complex and slower but supports viable restaurants seeking to continue operations. Chapter 7 is appropriate when continuing operations is impossible or undesired.
Under chapter 7 bankruptcy, sometimes referred to as a liquidation, restaurants close their doors for good and the assets are sold off or liquidated to pay off creditors. Under chapter 11 bankruptcy, also referred to as a reorganization, the restaurant remains an ongoing concern and can keep its doors open while it agrees on a reorganization plan with its creditors for the repayment of all or a portion of its debts.
Although chapter 11 bankruptcy is a more complex option and takes longer, it's a better option for restaurants that want to, and can, remain in business, with a bit of restructuring help. Under chapter 11, the restaurant (debtor) can work with its creditors and the court to restructure its debt and operations, including contracts and leases. Chapter 11 bankruptcy was the option that most of the chain restaurants you grew up with that went bankrupt in the past year chose to pursue, including TGI Friday's.
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