What is Chapter 11 Bankruptcy?

Chapter 11 is one of four sections of the Federal Bankruptcy Code.

Chapter 11 was designed to help businesses in financial trouble restructure their organization and finances so they may continue to operate, rather than be liquidated.

In a Chapter 11 proceeding, a reorganization plan is filed, either by the debtor, the creditors, or both. After the plan is submitted, it must be approved, or "confirmed" by the court. Once that occurs, the debtor and creditors must go by the terms spelled out in the plan. During the bankruptcy proceedings, the individual or business may continue doing business as usual, as long as regular operating reports are provided.

Advantages and disadvantages of Chapter 11

Chapter 11 is designed to help a business recover from financial distress. It allows the company to reorganize operations and continue to function while under supervision of the bankruptcy court. Congress enacted Chapter 11 because it believed that a rehabilitated business is better for the economy than the unemployment and waste of assets that occur when a business goes under.

While in Chapter 11 reorganization, creditors must obey a court-ordered stay and refrain from taking action against the business. Unlike other forms of bankruptcy, under Chapter 11, the creditors also have a right to file a plan of reorganization, and creditor interests and other claims are represented by committees. It’s assumed under the law that most business failures result from unavoidable market changes, rather than from incompetent management or fraud, so a debtor is usually allowed to remain in control of the business during reorganization, unless the court finds just cause or other reason to have a trustee run it. Of course, filing Chapter 11 will affect the business's credit rating, as well as impact its employees and shareholders.

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