Chapter 11 Bankruptcy Explained

Chapter 11 bankruptcy is a form of bankruptcy reorganization available to partnerships, corporations, or individuals whose debt levels exceed the limits of Chapter 13 bankruptcy. Most often, Chapter 11 is utilized by businesses seeking to restructure their debt. Many times, business bankruptcy may be the only means of preserving the value of the business for sale, or of forcing its creditors to accept a debt reorganization plan. The debtor usually remains in possession of its assets, and operates the business under the supervision of the court and for the benefit of creditors.

Chapter 11 is probably the most flexible of all the chapters. Chapter 11 can be used to accomplish the following:

  1. Reject and renegotiate unfavorable leases, as well as other contracts.
  2. Renegotiate terms of secured financing, including interest rates, when payments are due, and allow the debtor to maintain the secured collateral.
  3. Stop forced liquidation of assets and allow the business time to sell its assets or the entire business for its going concern value.
  4. Stop lawsuits or other litigation costing the business lots of money.
  5. Negotiate new credit terms with suppliers and other creditors.
  6. Repay overdue payables and debts over a greater period of time.

Chapter 11′s flexibility makes it generally much more expensive to the debtor. They require far more work than Chapter 7 or Chapter 13s including monthly operating reports, quarterly trustee payments, negotiating with creditors, coming up with a reorganization plan unique to the situations, soliciting votes, working out adequate protection orders, and possibly having to file a cash collateral motion.