An Overview of Chapter Eleven Bankruptcy
*DRAFT*
This is how it works, folks.
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.
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.
A Chapter 11 bankruptcy will result in one of three outcomes for the debtor: reorganization, conversion to Chapter 7 bankruptcy, or dismissal. 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. 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. 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.