The 2 Types Of Bankruptcy Restaurants Are Most Likely To File

Running a restaurant can be a tough business. The industry as a whole suffered during the COVID-19 pandemic. After a brief recovery, recent economic conditions have created additional problems and accelerated restaurant failures and the number of restaurants declaring bankruptcy. Although there are six types of bankruptcies under the U.S. Bankruptcy Code (chapters 7, 9, 11, 12, 13, and 15), there are two types of bankruptcies that restaurants are most likely to file when they run into financial problems: chapter 7 bankruptcy and chapter 11 bankruptcy.

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. Which bankruptcy a restaurant will declare depends in large part on its individual financial and other circumstances.

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 and Red Lobster (which has been rescued from bankruptcy and is now run by a former P.F. Chang's CEO).

When a restaurant is facing insurmountable financial issues and cannot (or does not want to) continue operating, then chapter 7 bankruptcy is a better option. Once the bankruptcy filing is made, the restaurant closes immediately, and a trustee appointed by the court takes over all its assets to sell and liquidate to pay off its creditors. The process usually takes a few months, and once complete, the restaurant is absolved of all its debts.However, there is sometimes hope for a restaurant that closed under chapter 7 bankruptcy: the chain Steak and Ale got a second life years after bankruptcy when its brand (which was sold as part of the bankruptcy proceedings) was purchased in 2015 by its new owners, who reopened the restaurant in 2024.