Chapter 11 bankruptcy is a legal process that allows a struggling business to reorganize its debts and try to become financially viable again without liquidating its assets. Unlike Chapter 7 bankruptcy, which involves selling off assets to pay creditors, Chapter 11 focuses on restructuring the company's operations and debts so the business can continue operating. Key points about Chapter 11 bankruptcy:
- It is often called "reorganization bankruptcy."
- The business (debtor) files a petition with the bankruptcy court and submits a plan to reorganize its debt.
- The court oversees the process and may appoint a trustee, but typically the existing business management remains in control as the "debtor in possession."
- The business can continue operating while repaying creditors under the approved reorganization plan.
- The plan can include downsizing, renegotiating contracts, or liquidating some assets to improve financial health.
- Creditors vote on the plan, and if approved by the court, it becomes binding.
- This form of bankruptcy aims to help companies emerge healthier, with debt reduced or restructured, rather than shutting down.
Though it is mostly used by corporations or partnerships, individuals with large debts may also file Chapter 11. In summary, Chapter 11 bankruptcy gives businesses a chance to reorganize and survive financial difficulties by adjusting how they manage their debts, often allowing continued business operations rather than shutting down entirely. It balances interests between debtors and creditors under court supervision. Examples of famous companies that have used Chapter 11 include Lehman Brothers, General Motors, and Kmart. This understanding aligns with legal definitions and explanations from reputable sources such as Investopedia, Cornell Law, and the United States Courts.
