Chapter 11 Bankruptcy is a form of bankruptcy that involves the reorganization of the debtor’s business, debts, and assets, hence the name “restructuring” bankruptcy. Chapter 11 Bankruptcy is generally designed to provide commercial debtors such as corporations and LLCs with the ability to restructure their debts. Chapter 11 is the part of the bankruptcy code that allows businesses to restructure their debts. The primary purpose of Chapter 11 bankruptcy is to provide businesses and individuals with substantial debts the opportunity to restructure their finances.
Chapter 11 bankruptcy is a formal process that allows debtors and creditors to resolve a debtor’s financial shortfalls through a reorganization plan. Under Chapter 11 bankruptcy, the debtor proposes a reorganization plan to repay creditors over time. Debtors use the time from filing to confirming a debt repayment plan to restructure their finances. In Chapter 11, a person or company filing for bankruptcy has the first opportunity to file a reorganization plan.
Failure to reorganize and approve a debt repayment plan may result in a Chapter 11 case being converted to a Chapter 7 case in liquidation. Chapter 11 usually results in a reorganization of the debtor’s business or personal assets and debts, but can also be used as a settlement mechanism. With a Chapter 11 reorganization, debtors are given a second chance while creditors receive a higher recovery than in liquidation. Under chapter 11, long-term relief can be achieved in the form of a reorganization of the debtor’s business or an orderly and debtor-controlled liquidation of the debtor’s assets.
When the bankruptcy court authorizes debt retention financing, creditors may receive preferential terms in providing financing to corporations under Chapter 11 Bankruptcy, including prioritizing their debt over debts and obligations prior to filing a petition (also some secured debts). Unless the court decides otherwise, the debtor, as a debtor in possession, may obtain an unsecured loan and incur unsecured debt in the ordinary course of a Chapter 11 case without court approval. In practice, Chapter 11 allows a possessing debtor to use assets and negotiate in the ordinary course of business without prior court approval. Unless a court decides otherwise, a debtor may use, sell, or lease any of the debtor’s property, with the exception of collateral, in the ordinary course of business in a Chapter 11 case without prior notice to creditors or court approval.
After filing a Chapter 11 case, the debtor must file documents with the court showing the names and addresses of all of its creditors and owners, a description of all of its property and other assets, and disclosures of its financial condition. In Chapter 11, the debtor has the right to present a plan to repay the debt for review by creditors and the bankruptcy court.
Unlike a Chapter 7 bankruptcy, which results in the liquidation of a firm’s operations and liquidation of its assets to raise money to pay the firm’s creditors, a Chapter 11 bankruptcy will continue to operate even if it is under court supervision for a specified period of time. Upon filing a voluntary or involuntary filing, the company is considered a “debtor in possession”, meaning that the company retains control of its assets while it is in bankruptcy under Chapter 11. In Chapter 11, in most cases, the debtor retains control of its business operations as a debtor is in possession of and subject to the supervision and jurisdiction of the court.
Section 109 of the Bankruptcy Code permits, and the courts accept, that individual debtors who are not corporate entities may apply for relief under chapter 11. In the event that a committee of creditors or a trustee in a case requires that the bankruptcy court rejected the reorganization plan, the company may be forced to convert from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy.
The bankruptcy judge will only approve the Chapter 11 plan when the creditors are satisfied that they will receive at least as much as they would have received in a liquidation. The approved chapter 11 plan becomes an agreement between the debtor and creditors regulating their rights and obligations. The confirmation releases the debtor from most of the debts existing on the date of application.
This reorganization, known as “Chapter 11 Bankruptcy,” is available to any business, whether organized as a corporation, partnership, or sole proprietorship and to individuals, although such a reorganization is primarily used by legal entities. In some cases, “liquidation plans” disrupt the debtors’ operations and involve the orderly sale of their remaining property, although the debtor can achieve this under Chapter 7 business bankruptcy for much less money. The bankruptcy court may allow shareholders to retain ownership of the debtor in exchange for “new money” to pay for reorganization costs.« Back to Glossary