Financial Dictionary -> Debt -> Chapter11

When a company or business can no longer pay off its debts, the business can voluntarily file for bankruptcy, or the creditors can enforce bankruptcy, both falling under either chapter 7 or chapter 13 of the Bankruptcy Code.

Whereas in chapter 7 of the code the business must cease operation and liquidate all of its assets to cover its debt, under chapter 11 of the code the debtor continues ownership, and is given the ability to reorganize or downsize the business and its operations. This allows the business to continue operations, albeit under a radical new structure.

Methods by which a debtor is allowed to restructure their business are granted by the courts, and may include the ability to obtain new loans and finance with more lenient terms, allowing them to cancel costly contracts and deals, and any further action against the debtor is put on hold until the current bankruptcy is processed.

If the company is in a state where a complete restructuring will leave the owners with nothing to operate with, the company is then given in its new clean state to the creditors, who assume ownership, either selling everything off, or running the business as a future investment.

The process of chapter 11 is worked on closely between the debtors and creditors through the courts. The creditors must agree on the proposed plan for restructuring before it goes ahead, to ensure that they get the best out of the situation, and hopefully get a good percentage of what they are owed in the end. Initially Debtors have the exclusive right to propose such a plan for restructuring for around 120 days before the debtors. Then after that time has passed, creditors may have their say.

If the reorganization process goes badly or cannot be agreed on, the courts may go in to the traditional complete liquidation process like in chapter 7 of the code.