What is 'Chapter 11'

Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor's business affairs, debts and assets. Named after the U.S. bankruptcy code 11, Chapter 11 is generally filed by corporations that require time to restructure their debts, and it gives the debtor a fresh start, subject to the debtor's fulfillment of his obligations under the plan of reorganization. As the most complex of all bankruptcy cases and generally the most expensive, a company should consider Chapter 11 reorganization only after careful analysis and exploration of all other alternatives.

BREAKING DOWN 'Chapter 11'

Chapter 11 helps a business restructure its debts and obligations. It does not usually shutter the business. In fact, many large U.S. companies have filed Chapter 11 and stayed afloat. They include General Motors, United Airlines, K-mart and thousands of other corporations.

Corporations, partnerships and limited liability companies (LLCs) usually file Chapter 11, but in rare cases, individuals with a lot of debt, who do not qualify for Chapter 7 or 13, may qualify for Chapter 11. It takes between a few months and two years to complete a Chapter 11 bankruptcy case.

Business Operations During Bankruptcy Cases

While a business is in the midst of filing Chapter 11, it may still continue to operate. In most cases, the debtor, called a debtor in possession, runs the business as usual. However, in cases involving fraud, dishonesty or gross incompetence, a trustee steps in to run the business through the bankruptcy proceedings.

The business is banned from making certain decisions without the permission of the courts. These include the sale of assets other than inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court also has control over decisions related to retaining and paying attorneys, and entering contracts with vendors and unions. Finally, the debtor is not allowed to arrange a loan that will commence after the bankruptcy is complete.

Reorganization

In a Chapter 11 bankruptcy, the individual or business filing bankruptcy has the first chance to propose a reorganization plan. These plans may include downsizing of business operations to reduce expenses, as well as renegotiating debts. In some cases, plans involve liquidating all assets to repay creditors. If the plan is feasible and fair, the courts accept it, and the process moves forward. The plan must also be in the best interest of the creditors. If the debtor does not suggest a plan, the creditors may propose one instead.

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