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<a href="index.html">Screener</a> / <a href="glossary.html">Glossary</a> / Chapter 11
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<h1>Chapter 11 Bankruptcy Explained: Business Reorganization</h1>
<p class="subtitle">Chapter 11 lets businesses restructure debts while continuing to operate. A streamlined version called Subchapter V makes this accessible to small businesses.</p>
<h2>What Chapter 11 is</h2>
<p>Chapter 11 is a reorganization bankruptcy governed by <a href="https://www.law.cornell.edu/uscode/text/11/chapter-11">11 U.S.C. Chapter 11</a>. It allows a business -- or, in some cases, an individual -- to continue operating while restructuring debts under court supervision. The debtor proposes a reorganization plan that specifies how each class of creditors will be treated. If the court confirms the plan, the debtor pays according to its terms and emerges from bankruptcy as a going concern.</p>
<p>Unlike Chapter 7, which liquidates the business, Chapter 11 is designed to preserve it. The debtor usually stays in control as a "debtor in possession" and continues running day-to-day operations during the case.</p>
<h2>Who files Chapter 11</h2>
<p>Chapter 11 is available to businesses of any size, from sole proprietorships to publicly traded corporations. Individuals who exceed the debt limits for <a href="chapter-13.html">Chapter 13</a> can also file Chapter 11. There is no debt ceiling.</p>
<p>Common Chapter 11 filers include:</p>
<ul>
<li>Small businesses that need to restructure leases, contracts, or secured debt</li>
<li>Corporations reorganizing under financial distress</li>
<li>Individuals with debts above the Chapter 13 limits</li>
</ul>
<h2>How it works</h2>
<p>The debtor files a petition and typically retains control of the business as debtor in possession. The process involves several key phases:</p>
<ol>
<li><strong>Automatic stay.</strong> Upon filing, creditors must stop all collection activity, lawsuits, and foreclosures.</li>
<li><strong>Operating the business.</strong> The debtor continues operations, pays employees, and serves customers. Major decisions (selling assets, taking on new debt) require court approval.</li>
<li><strong>Proposing a plan.</strong> The debtor proposes a reorganization plan that classifies creditors and specifies what each class will receive.</li>
<li><strong>Creditor voting.</strong> Impaired creditors vote on the plan. A class accepts if a majority in number holding two-thirds in amount vote yes.</li>
<li><strong>Confirmation.</strong> The court confirms the plan if it meets statutory requirements. If not all classes accept, the court may confirm over objections through "cramdown" under <a href="https://www.law.cornell.edu/uscode/text/11/1129">Section 1129(b)</a>.</li>
</ol>
<h2>Subchapter V: small business fast track</h2>
<p>The Small Business Reorganization Act of 2019 added Subchapter V to Chapter 11, creating a streamlined process for small business debtors with total debts below a specified threshold (currently $7.5 million as extended).</p>
<div class="statute-box">
<div class="label">Key Subchapter V differences</div>
<p><strong>No creditors' committee</strong> -- reduces cost and complexity. <strong>Trustee facilitates, does not replace management</strong> -- the debtor stays in control. <strong>No absolute priority rule</strong> -- equity holders can retain interests even if unsecured creditors are not paid in full, provided the plan is fair and equitable. <strong>Faster confirmation</strong> -- the debtor has 90 days to file a plan. <strong>Cramdown without creditor acceptance</strong> -- the debtor can confirm a plan under <a href="https://www.law.cornell.edu/uscode/text/11/1191">Section 1191(b)</a> even if no creditor class votes to accept.</p>
</div>
<p>Subchapter V has made Chapter 11 viable for small businesses that previously could not afford the cost or complexity of traditional Chapter 11.</p>
<h2>Chapter 11 vs. other chapters</h2>
<table>
<tr><th scope="col"></th><th scope="col">Chapter 11</th><th scope="col">Chapter 7</th><th scope="col">Chapter 13</th></tr>
<tr><td><strong>Purpose</strong></td><td>Reorganize and continue</td><td>Liquidate and close</td><td><a href="https://chapter13plan.org" title="Chapter 13 Repayment Plan -- Open Bankruptcy Project" target="_blank" rel="noopener">Repayment plan</a></td></tr>
<tr><td><strong>Who can file</strong></td><td>Businesses and individuals</td><td>Businesses and individuals</td><td>Individuals only</td></tr>
<tr><td><strong>Debt limits</strong></td><td>None</td><td>None</td><td>$2.75M combined</td></tr>
<tr><td><strong>Cost</strong></td><td>Higher (attorney fees, trustee fees)</td><td>Lower</td><td>Moderate</td></tr>
<tr><td><strong>Business continues</strong></td><td>Yes</td><td>No (entity dissolved)</td><td>N/A (individuals)</td></tr>
</table>
<div class="warning-box">
<div class="label">Individual filers</div>
<p>If you are an individual considering Chapter 11, it is typically because your debts exceed the Chapter 13 limits. Individual Chapter 11 cases work similarly to Chapter 13 but with more procedural requirements and higher costs. Consult a bankruptcy attorney to determine whether Chapter 11 or Chapter 13 is appropriate for your situation.</p>
</div>
<h2>The debtor in possession (DIP)</h2>
<p>In most Chapter 11 cases, the debtor continues to manage the business as a "debtor in possession" (DIP) under <a href="https://www.law.cornell.edu/uscode/text/11/1107">Section 1107</a>. The DIP has most of the powers and duties of a trustee but is essentially the same management team that was running the business before the filing.</p>
<p>As DIP, the debtor can:</p>
<ul>
<li>Continue ordinary business operations without court approval</li>
<li>Use, sell, or lease property in the ordinary course of business</li>
<li>Employ professionals (attorneys, accountants, financial advisors) with court approval</li>
<li>Assume or reject executory contracts and unexpired leases</li>
<li>Propose a reorganization plan</li>
</ul>
<p>However, the DIP is subject to heightened fiduciary duties. The business is no longer operated solely for the benefit of its owners -- it must act in the interest of all creditors and the bankruptcy estate. Extraordinary transactions, such as selling major assets outside the ordinary course of business or borrowing new money, require court approval.</p>
<p>If the debtor mismanages the estate, engages in fraud, or fails to comply with court orders, the court may appoint a Chapter 11 trustee to replace management. This is relatively rare but serves as an important check on debtor conduct.</p>
<h2>Creditor committees</h2>
<p>In traditional (non-Subchapter V) Chapter 11 cases, the U.S. Trustee typically appoints an official committee of unsecured creditors under <a href="https://www.law.cornell.edu/uscode/text/11/1102">Section 1102</a>. This committee represents the interests of all unsecured creditors in the case.</p>
<p>The committee has the right to:</p>
<ul>
<li>Consult with the debtor on the administration of the case</li>
<li>Investigate the debtor's financial affairs and business operations</li>
<li>Participate in formulating a reorganization plan</li>
<li>Request the appointment of a trustee or examiner</li>
<li>Hire its own attorneys and financial advisors (paid from the estate)</li>
</ul>
<p>Committee professionals add significant cost to a Chapter 11 case, which is one reason Subchapter V eliminates the committee requirement for small businesses. In larger cases, the committee plays a critical role in negotiating plan terms and ensuring that creditors receive fair treatment.</p>
<h2>Plan confirmation requirements (Section 1129)</h2>
<p><a href="https://www.law.cornell.edu/uscode/text/11/1129">Section 1129</a> sets the requirements for confirming a Chapter 11 plan. The plan must satisfy all applicable provisions, including:</p>
<ul>
<li><strong>Good faith.</strong> The plan must be proposed in good faith and not by any means forbidden by law.</li>
<li><strong>Best interest test.</strong> Every dissenting creditor must receive at least as much under the plan as they would receive in a Chapter 7 liquidation.</li>
<li><strong>Feasibility.</strong> The court must find that the plan is not likely to be followed by further financial difficulty or the need for another reorganization. This is one of the most litigated requirements -- the debtor must show realistic financial projections demonstrating the ability to make all plan payments.</li>
<li><strong>Priority claims paid in full.</strong> Administrative expenses, tax claims, and other priority claims must generally be paid in full on the effective date of the plan.</li>
<li><strong>At least one impaired class accepts.</strong> Unless the plan is a "cramdown," at least one class of impaired claims must vote to accept the plan (excluding insiders).</li>
</ul>
<p>If not all impaired classes accept the plan, the debtor can seek "cramdown" confirmation under Section 1129(b). Cramdown requires that the plan does not discriminate unfairly and is fair and equitable with respect to each dissenting impaired class. For secured creditors, this generally means the plan pays at least the value of the collateral. For unsecured creditors, the absolute priority rule requires that no junior interest (such as equity holders) receive anything unless senior classes are paid in full -- though Subchapter V eliminates this requirement.</p>
<h2>When Chapter 11 makes sense for individuals</h2>
<p>Although Chapter 11 is primarily associated with business reorganizations, individuals file Chapter 11 in several situations:</p>
<ul>
<li><strong>Debt exceeds Chapter 13 limits.</strong> Chapter 13 is limited to debtors with combined debts below approximately $2.75 million. Individuals with higher debt loads -- such as those with large mortgages, business debts, or tax liabilities -- must use Chapter 11.</li>
<li><strong>Business owners.</strong> Sole proprietors whose business and personal debts are intertwined may prefer Chapter 11 to keep the business operating while restructuring both personal and business obligations. Subchapter V has made this significantly more accessible.</li>
<li><strong>Complex asset structures.</strong> Individuals with multiple properties, investments, or business interests may need the flexibility of Chapter 11's plan provisions rather than Chapter 13's more rigid framework.</li>
<li><strong>Higher income.</strong> Individuals with substantial income who want to propose a <a href="https://chapter13plan.org" title="Chapter 13 Repayment Plan -- Open Bankruptcy Project" target="_blank" rel="noopener">repayment plan</a> but whose debts exceed Chapter 13 limits can use Chapter 11 to restructure payments.</li>
</ul>
<p>Individual Chapter 11 cases are subject to some provisions that do not apply to business debtors, including the <a href="https://meanstest.org" title="Bankruptcy Means Test -- Open Bankruptcy Project" target="_blank" rel="noopener">means test</a> (in some circuits) and the requirement that post-petition earnings be included in the bankruptcy estate. The cost of an individual Chapter 11 -- typically $15,000 to $50,000 or more in attorney fees -- means it is generally only practical when the debt amounts justify the expense.</p>
<h2>Related resources</h2>
<ul>
<li><a href="chapter-7.html">Chapter 7 Explained</a> -- Liquidation and <a href="https://bankruptcyfreshstart.org" title="Fresh Start After Bankruptcy -- Open Bankruptcy Project" target="_blank" rel="noopener">fresh start</a></li>
<li><a href="chapter-13.html">Chapter 13 Explained</a> -- <a href="https://chapter13plan.org" title="Chapter 13 Repayment Plan -- Open Bankruptcy Project" target="_blank" rel="noopener">Repayment plan</a> for individuals</li>
<li><a href="chapter-12.html">Chapter 12 Explained</a> -- Family farmer and fisherman reorganization</li>
<li><a href="compare.html">Compare All Discharge Bars</a> -- Timing rules for repeat filings</li>
<li><a href="glossary.html">Glossary</a> -- Bankruptcy terms in plain English</li>
<li><a href="how-much-does-bankruptcy-cost.html">How Much Does Bankruptcy Cost?</a></li>
</ul>
<h2>Legal references</h2>
<ul>
<li><a href="https://www.law.cornell.edu/uscode/text/11/chapter-11">11 U.S.C. Chapter 11</a> -- Reorganization</li>
<li><a href="https://www.law.cornell.edu/uscode/text/11/1129">11 U.S.C. Section 1129</a> -- Confirmation of plan</li>
<li><a href="https://www.law.cornell.edu/uscode/text/11/1191">11 U.S.C. Section 1191</a> -- Confirmation in Subchapter V cases</li>
<li><a href="https://www.law.cornell.edu/uscode/text/11/1181">11 U.S.C. Section 1181</a> -- Subchapter V definitions</li>
<li><a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">Chapter 11 Bankruptcy Basics</a> -- U.S. Courts</li>
</ul>
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<a href="chapter-13.html">Chapter 13</a>
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