Chapter 11

What Is Chapter 11?

Chapter 11 is a bankruptcy category in the United States that allows struggling businesses to restructure their finances to pay their debts over time.

Deeper Definition

The Chapter 11 bankruptcy category is otherwise known as the “reorganization bankruptcy.” That is because it involves reorganizing a debtor’s business, debts, and assets to suit better the repayment of the debts they owe. Under the Chapter 11 bankruptcy proceeding, a debtor must propose a reorganization plan that should be in their creditors’ best interest. Affected creditors may vote on the reorganization plan, and the bankruptcy court may confirm it if it satisfies specific legal requirements.

Typically, a chapter 11 bankruptcy proceeding begins with filing a petition at the bankruptcy court serving the area where the debtor resides or situates their business. A debtor may voluntarily file the petition, or three or more creditors may file it on their behalf. Debtors that file this are usually large corporations due to the large sum of money involved. Though the section is open to individuals, most people opt for Chapter 7 and Chapter 13 because they are quicker and cheaper.

The Chapter 11 bankruptcy category allows businesses to continue operating, unlike other bankruptcy categories where a bankruptcy trustee takes charge of the company and its assets. After filing the petition, the business or individual will take up to four months to develop a reorganization plan. Essentially, the reorganization plan is an agreement between the debtor and creditors on how the business will operate and pay its debts over time. It may include downsizing business operations to reduce expenses, renegotiating interest rates on debts, or liquidating assets.

Chapter 11 Example

Due to the Coronavirus pandemic, an outdoor and recreational company is experiencing low patronage, causing them to fall behind on their debt payment. The company decides to file for a Chapter 11 bankruptcy to get some time to restructure its business without interference from creditors. Once filled, the court places a temporary “automatic stay” that prohibits their creditors from pursuing them. After four months, the company proposes a reorganization plan that includes downsizing, liquidating some assets, and refocusing the company’s services. The court accepted the reorganization plan, and within a year, the company could significantly lower its debts.