Chapter 11, Title 11, United States Code
Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.[1] In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.
"Chapter 11" redirects here. For other uses, see Chapter 11 (disambiguation).Chapter 11 overview[edit]
When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.
In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.[2]
In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.[3]
A Chapter 11 bankruptcy will result in one of three outcomes for the debtor: reorganization, conversion to Chapter 7 bankruptcy, or dismissal.[4] In order for a Chapter 11 debtor to reorganize, the debtor must file (and the court must confirm) a plan of reorganization. In effect, the plan is a compromise between the major stakeholders in the case, including the debtor and its creditors.[5] Most Chapter 11 cases aim to confirm a plan, but that may not always be possible.
If the judge approves the reorganization plan and the creditors all agree, then the plan can be confirmed. Section 1129 of the Bankruptcy Code requires the bankruptcy court reach certain conclusions prior to confirming or approving the plan and making it binding on all parties in the case, most notably that the plan complies with applicable law and was proposed in good faith.[2][6] The court must also find that the reorganization plan is feasible in that, unless the plan provides otherwise, the plan is not likely to be followed by further reorganization or liquidation.[7][8]
In a Chapter 11 bankruptcy, the debtor corporation is typically recapitalized so that it emerges from bankruptcy with more equity and less debt, a process through which some of the debtor corporation's debts may be discharged. Determinations as to which debts are discharged, and how equity and other entitlements are distributed to various groups of investors, are often based on a
valuation of the reorganized business.[9] Bankruptcy valuation is often highly contentious because it is both subjective and important to case outcomes. The methods of valuation used in bankruptcy have changed over time, generally tracking methods used in investment banking, Delaware corporate law, and corporate and academic finance, but with a significant time lag.[10][11][12]
Considerations[edit]
The reorganization and court process may take an inordinate amount of time, limiting the chances of a successful outcome and sufficient debtor-in-possession financing may be unavailable during an economic recession. A preplanned, pre-agreed approach between the debtor and its creditors (sometimes called a pre-packaged bankruptcy) may facilitate the desired result. A company undergoing Chapter 11 reorganization is effectively operating under the "protection" of the court until it emerges. An example is the airline industry in the United States; in 2006 over half the industry's seating capacity was on airlines that were in Chapter 11.[39] These airlines were able to stop making debt payments, break their previously agreed upon labor union contracts, freeing up cash to expand routes or weather a price war against competitors — all with the bankruptcy court's approval.
Studies on the impact of forestalling the creditors' rights to enforce their security reach different conclusions.[40]