Restructuring basics
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
5 min read · updated July 8, 2026
Sooner or later some company borrows more than it can pay back. A downturn hits, sales drop, and the interest bill outruns the cash coming in. The business is not necessarily worthless, it just owes more than it is worth. Fixing that mismatch between a company and its debts is restructuring, and it is one of the most active corners of banking when the economy turns.
There are two ways to fix it, and the first thing to know is which door the company walks through.
Two paths: out of court versus Chapter 11
The cheaper, faster path is an out-of-court restructuring. The company sits down directly with its lenders and negotiates. Maybe they agree to push out the maturity date, cut the interest rate, or swap old debt for new debt worth less (a distressed exchange). No judge, no courtroom, lower fees. The catch is that it usually needs almost every lender to agree, and a single holdout can block the deal.
When the debt is too tangled or too many lenders disagree, the company files for Chapter 11, the court-supervised reorganization used in the United States. This is the part people get wrong: Chapter 11 is not the company shutting down. The business keeps operating, keeps paying employees, keeps selling to customers, all while a judge oversees a process that fixes the balance sheet. A court can also force a restructuring on holdout creditors that would have blocked an out-of-court deal, which is often the whole reason to file.
Chapter 11 is a reorganization, not a funeral. The company stays alive and fixes its debts under court protection. Liquidation, where the business is shut down and its assets sold off for parts, is a separate process (Chapter 7). Confusing the two is a fast way to look green in an interview.
To keep operating during the case, a company often needs fresh cash. That comes from DIP financing (debtor-in-possession financing), new money lent to a company already in bankruptcy. Because it jumps ahead of everyone else in line, lenders are willing to provide it.
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Frequently asked
- What is the difference between out-of-court restructuring and Chapter 11?
- An out-of-court restructuring is cheaper and faster: the company negotiates directly with lenders to push out maturities, cut rates, or swap debt, but it usually needs nearly every lender to agree. Chapter 11 is court-supervised reorganization that can force a deal on holdout creditors, which is often the whole reason to file.
- What is the absolute priority rule in a bankruptcy waterfall?
- The absolute priority rule says a junior claim gets nothing until the claim above it is paid in full. Value pours down in strict order: secured lenders first, then unsecured and senior bonds, then subordinated debt, then equity. Equity is the residual claim, so it is typically wiped out in a restructuring.
- What is a recovery rate?
- The recovery rate is the percentage of what a creditor is owed that it actually gets back. A bond that pays back 40 cents on the dollar has a 40% recovery. In a typical case secured lenders recover in full, the fulcrum layer recovers partially, and equity recovers zero because nothing is left.
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