Chapter 11 bankruptcy is a form of bankruptcy reorganization available to individuals, corporations and partnerships.
It is the usual choice for large businesses seeking to restructure their debt.
Individuals usually file Chapter 7 or Chapter 13 rather than Chapter 11, which are simpler and less expensive.
Don’t confuse Title 11, the section of the U.S. Code that covers all kinds of bankruptcy, with Chapter 11, a particular kind of bankruptcy found within Title 11.
How Chapter 11 works
The debtor in Chapter 11 usually remains in possession of its assets, and operates the business under the supervision of the court and for the benefit of creditors.
The debtor in possession is a fiduciary for the creditors. If the debtor’s management is ineffective or less than honest, a trustee may be appointed.
A creditors committee is usually appointed by the U.S.Trustee from among the 20 largest, unsecured creditors who are not insiders. The committee represents all of the creditors in providing oversight for the debtor’s operations and a body with whom the debtor can negotiate an acceptable plan of reorganization.
A Chapter 11 plan is confirmed only upon the affirmative votes of the creditors, who are divided by the plan into classes based on the characteristics of their claims, and whose votes are a function of the amount of their claim against the debtor.
If the debtor can’t get the votes to confirm a plan, the debtor can attempt to “cram down” a plan on creditors and get the plan confirmed despite creditor opposition, by meeting certain statutory tests.
Chapter 11 is probably the most flexible of all the chapters, and as such, it is the hardest to generalize about. Its flexibility makes it generally more expensive to the debtor.
The rate of successful Chapter 11 reorganizations is depressingly low, sometimes estimated at 10% or less. The complex rules and requirements in Chapter 11 increase the costs to file the case and prosecute a plan to confirmation far beyond than other forms of bankruptcy.
Individuals usually reorganize under Chapter 13, which offers a streamlined plan at modest cost that allows the individual to keep possession of his assets, catch up on secured debt, and discharge unsecured debt at the end of the plan.
Explore Chapter 7 and Chapter 13.
Image courtesy of Leo Reynolds.