What is Chapter 11?
Chapter 11 is the "reorganization" chapter of the United States Bankruptcy Code. The
Bankruptcy Code is the set of laws in the United States that governs bankruptcy and
In the United States, companies generally file bankruptcy either under chapter 7 or
chapter 11 of the Bankruptcy Code. Chapter 7 is the "liquidation" chapter of the
Bankruptcy Code. Under this chapter, a trustee is appointed to administer the company's
estate. The trustee is charged with collecting and liquidating all assets of the company
and then distributing the cash proceeds to the company's legitimate creditors in
accordance with the rules of priority set forth in the Bankruptcy Code.
When a company files bankruptcy, it is usually then referred to as the "debtor." Chapter
11, on the other hand, is the "reorganization" chapter of the Bankruptcy Code. Under
chapter 11, a debtor enters bankruptcy with the hope of reorganizing its business affairs,
altering its debt structure, and then "emerging" from bankruptcy as a streamlined
business operation that is more viable financially and more able to compete in the
Under chapter 11, a debtor will at some point in the case file a "plan" of reorganization.
The plan describes how the debtor will pay its debts and how the debtor will otherwise
emerge from bankruptcy. Creditors of the debtor have an opportunity to review and vote
on the plan and also object to the plan if a creditor believes the plan does not comply
with the Bankruptcy Code. The bankruptcy court ultimately must approve the plan by
"confirming" it. Once the plan is confirmed, it becomes a binding contract between the
debtor and its creditors. The creditors then have no option other than getting paid
according to the plan.
Once the plan is filed, there is a two-step process to "confirmation." When the debtor
files its plan, the debtor usually files a companion document called a "disclosure
statement." The disclosure statement is like a proxy statement under the securities laws
of the United States. The disclosure statement is designed to provide creditors with all
the information they need to make an informed decision on whether to vote for or against
The bankruptcy court first approves the disclosure statement and, if approved, then sets
the plan itself for a confirmation hearing. The confirmation hearing is when the
bankruptcy usually approves or denies confirmation of the plan. As mentioned above,
creditors may object to confirmation if they believe the plan does not comply with the
Bankruptcy Code. Creditors are also asked to vote on the plan. Generally, creditors are
divided into classes under the plan, and each class of creditors then votes.
If the bankruptcy court confirms the plan, the plan becomes the new contract between
the debtor and its creditors. If the bankruptcy court denies confirmation, the debtor may
have the ability to propose a new plan or, as is more common, the debtor's case is
converted to a chapter 7 liquidation case. In that event, the company's business
operations cease, and the assets are then collected and liquidated. Generally, a successful
chapter 11 plan will provide more money than a chapter 7 liquidation case.
Although this is a brief and simplified overview of the chapter 11 process, it is a fair
characterization of the process. The process can take anywhere from a few months to a
few years to complete. The length of time depends on many factors, including the
viability of the debtor's business, the debtor's relationships with its creditors and other
factors. Generally, a debtor will emerge more quickly from chapter 11 if it has
negotiated and reached an agreement with its creditors regarding a plan. A debtor who
has been unable to reach an agreement with all or most of its creditors will likely spend
more time and more money in the chapter 11 process.
( abstract from a paper by R.Whelehan,2001)