Chapter 11, Title 11, United States Code facts for kids

When a business or even an individual cannot pay their debts, they might need to go through a process called bankruptcy. In the United States, there are different types of bankruptcy. Chapter 11 bankruptcy is a special type that helps businesses (like big companies or small shops) and sometimes individuals to reorganize their finances. This means they try to find a way to pay back their debts over time, instead of closing down completely.

This is different from Chapter 7 bankruptcy, where a business usually sells everything it owns to pay its debts and then closes. It's also different from Chapter 13, which is mostly for private individuals to reorganize their personal debts.

What is Chapter 11 Bankruptcy?

When a business cannot pay its creditors (the people or companies it owes money to), the business or its creditors can ask a federal bankruptcy court for help. They can choose Chapter 7 or Chapter 11.

In Chapter 7, the business stops working. A person called a trustee sells all its things. Then, the money goes to the creditors. Any money left over goes back to the owners.

In Chapter 11, the business usually stays open. The owners or managers keep running the business. But now, the court watches over them. This is like getting a second chance to fix things.

A Chapter 11 bankruptcy can end in three ways:

• The business reorganizes and gets back on track.
• The case changes to a Chapter 7, meaning the business closes.
• The case is dismissed, and the business goes back to how it was before, still owing money.

The main goal of Chapter 11 is to reorganize. To do this, the business must create a "plan of reorganization." This plan is like a deal between the business and its creditors. The court must approve this plan.

If the judge and creditors agree, the plan is "confirmed." This means it becomes official. The court checks that the plan follows the law. It also makes sure the plan is realistic. The business should be able to follow the plan without needing another bankruptcy later.

When a company reorganizes under Chapter 11, it often changes its financial structure. It might end up with less debt and more ownership (equity). Some of its old debts might even be removed.

How Chapter 11 Works

Chapter 11 has special tools to help businesses restructure. For example, the business can get new loans. These new lenders might get paid first from the business's earnings. This makes it easier for the struggling business to get money.

The court can also let the business cancel some contracts. This helps the business cut costs.

Automatic Stay

When a business files for Chapter 11, something called an "automatic stay" begins. This is like a pause button on all debt collection. Creditors cannot try to collect money from the business. Most lawsuits against the business also stop. This gives the business time to figure out its finances without constant pressure.

However, some things are not stopped. For example, family law cases (like child support) usually continue. Creditors can also ask the court to lift the stay if they have a good reason.

If a business is in deep trouble and cannot pay its debts, its owners might lose their ownership. Instead, the creditors might become the new owners of the reorganized company.

The court listens to all creditors. The court is the one who decides if the reorganization plan is fair and follows the law.

The Reorganization Plan

Chapter 11 usually helps a business reorganize its money and debts. But sometimes, it can also be used to sell off a business's assets. A Chapter 11 case can take a few months or several years. It depends on how big and complicated the business is.

The business usually gets the first chance to suggest a plan. This is called the "exclusivity period." For 120 days after filing, only the business can propose a plan. If they do, they get another 60 days (total 180 days) to get creditors to agree to it. After this time, other interested parties, like creditors, can also propose a plan. Then, creditors vote on the plan.

Plan Confirmation

If the judge approves the plan and the creditors agree, the plan is "confirmed." If some creditors do not agree, the plan can still be confirmed. This is called a "cramdown." For a cramdown to happen, the plan must be fair to all creditors. It cannot treat one group of creditors much worse than another.

Once the plan is confirmed, it becomes binding. This means everyone must follow it. It explains how debts will be paid and how the business will operate. If a plan cannot be confirmed, the court might change the case to Chapter 7 (liquidation). Or, the court might dismiss the case. If dismissed, the business goes back to its original state, and creditors can try to collect debts outside of bankruptcy law.

Before the plan can be confirmed, the court must approve a "disclosure statement." This statement gives creditors enough information to decide how to vote on the plan. After approval, the business asks creditors to vote. The plan can be changed before it is confirmed, as long as it still meets all Chapter 11 rules.

Small Business Chapter 11 (Subchapter V)

In 2019, a new part was added to Chapter 11 called "Subchapter V." This part is just for small businesses. It makes the bankruptcy process faster and cheaper for them.

Subchapter V keeps many good parts of Chapter 11. But it removes some of the complicated steps and costs. It helps small businesses negotiate a successful reorganization. It also helps them keep control of their business.

Here are some differences for Subchapter V:

• Only the small business can file a reorganization plan.
• A special "subchapter V trustee" is appointed. This trustee helps supervise the money and helps create a plan.
• There is no automatic committee of unsecured creditors.
• Small businesses do not have to pay quarterly fees to the U.S. Trustee.
• Most importantly, small business owners can often keep their ownership in the business. This happens as long as the plan is fair to all creditors.

Important Things to Know

The reorganization process can take a long time. This can make it harder for a business to succeed. Also, it might be hard to get enough new loans during a tough economy.

Sometimes, a business and its creditors agree on a plan before filing for bankruptcy. This is called a "pre-packaged bankruptcy." It can make the court process much faster.

A company in Chapter 11 is working "under the protection" of the court. For example, in 2006, many airlines in the United States were in Chapter 11. This allowed them to stop debt payments. They could also change their labor contracts. This freed up money to expand or compete. The bankruptcy court approved these actions.

Chapter 11 Statistics

How Often It Happens

The number of Chapter 11 cases went down by 60% from 1991 to 2003. One study found that businesses were using state laws for bankruptcy-like processes instead. These state processes were faster, cheaper, and more private.

However, another study said the drop might be because many bankruptcies were wrongly called "consumer cases" instead of "business cases."

Very large cases (over $50 million in assets) are almost always handled in federal bankruptcy court.

Biggest Cases

The largest bankruptcy in history was Lehman Brothers Holdings Inc. in 2008. It had $639 billion in assets when it filed for Chapter 11.

Here are some of the largest corporate bankruptcies:

Some of these companies, like Lehman Brothers and Enron, closed down. Others, like General Motors and Chrysler, reorganized and continued operating.

‡ The Enron assets were taken from a financial report filed in 2001. The company said its yearly finances were being reviewed when it filed for Chapter 11.

See also

• 722 redemption
• Administration (law) in the United Kingdom, Australia, and New Zealand
• Examinership in Ireland
• Insolvency law of Canada