After Red Lobster's bankruptcy shocked all-you-can-eat shrimp fans, explaining Chapter 11

For many Americans, your local Red Lobster may be a thing of the past.

The seafood chain closed dozens of restaurants ahead of an announcement last week that it was filing for Chapter 11 bankruptcy in Florida. The Sunshine State, New York and Texas had the most closures, USA TODAY found.

But does this mean the seafood chain will be gone for good? Here’s what filing for Chapter 11 bankruptcy means.

What is Chapter 11 bankruptcy?

A Chapter 11 bankruptcy is a reorganization, usually for a corporation or partnership. The debtor typically remains in possession as a trustee. With court approval, they can still operate the business and borrow new money. Most importantly, the corporation will propose a reorganization plan to pay creditors over time, which affected creditors vote on. 

The corporation doesn't liquidate its assets as in other types of bankruptcy. This is because the party in debt is more valuable in operation than liquidated because issues are likely only temporary, like low cash flow or weakened demand, according to the Cornell Law School’s Legal Information Institute.

In the case of Red Lobster, its bankruptcy filing detailed a 30% drop in guests since 2019. Other issues include debt, a slew of new CEOs and an all-you-can-eat shrimp controversy. 

"Filing for bankruptcy does not mean we are going out of business," reads part of Red Lobster's statement. "In fact, it means just the opposite. It is a legal process that allows us to make changes to our business and our cost structure so that Red Lobster can continue as a stronger company going forward."

It wasn't just the endless shrimp:Red Lobster's troubles detailed in bankruptcy filing

How does bankruptcy work?

Bankruptcy helps individuals or businesses settle debts they can no longer pay by liquidating assets or making a repayment plan. Bankruptcy is regulated by federal bankruptcy laws.

After you declare bankruptcy and the bankruptcy court eliminates your debt, collectors can no longer contact you about it. 

Not all debts can be eliminated by bankruptcy, including debt from child support or spousal support, most student loans, tax debts, government fines, wages you owe your employees or damages for personal injury you caused while driving intoxicated.

Types of bankruptcy

There are six types of bankruptcy. Some are specific to individuals while others serve large companies or municipalities. Here’s a look at the four you probably hear about the most:

• Chapter 7: For individuals or corporations, assets are liquidated 
• Chapter 11: Reorganization (rather than liquidation) for corporations or partnerships (individuals can file, too)
• Chapter 12: Family farmers and fishermen with regular income
• Chapter 13: Individuals to keep property and pay debts over time, also called a “wage earner’s plan”

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Contributing: Gabe Hauari