Simply put, Chapter 11 Bankruptcy is the rehabilitation or reorganization of a business (primarily) debtor to resolve debts. It is known as corporate bankruptcy because it is a form of corporate financial reorganization that typically allows companies to continue functioning and operating as a busienss while they follow debt repayment plans.
“Chapter 11” is named thus because it is a chapter of Title 11 of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to all types of businesses, whether they are organized as a corporation, partnership or sole proprietorship. Chapter 11 is also available to some individuals, although it is most prominently used by corporate entities.
The debtor, often with some form of input from its creditors, will create a reorganization plan under which it arranges to repay part or all of its debts.
Chapter 11 affords the debtor in possession a number of processes by which to restructure its business. A debtor in possession may acquire financing and loans on favorable terms by giving new lenders first priority on the business’s earnings. The court may also allow the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through an automatic stay. While the automatic stay is in place, creditors are stayed from collection attempts or other activities against the debtor in possession, and most litigation against the debtor is stayed, or placed on hold for a period of time, until the litigation can be resolved through bankruptcy court proceedings, or resumed in its original venue.
Chapter 11 reorganization has been used to rehabilitate a great many businesses over time. While losses in such situations do occur for creditors, the degree of losses are thought to be mitigated by some degree through restructuring debts and businesses to regain positive cash flow and monetary fluidity.
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