Chapter 11 bankruptcy allows businesses, whether organized as corporations, partnerships, or sole proprietorships, as well as individuals in certain situations, to undertake reorganization of operations and finances. Businesses typically file for Chapter 11 bankruptcy when they are no longer able to service debts or pay creditors, but when the business can still be reorganized and made profitable again. Unlike Chapter 7 bankruptcy, the debtor remains in control of the business and its operations as a debtor-in-possession, unless the court appoints a trustee.
As in a Chapter 13 bankruptcy, a Chapter 11 debtor is required to file a plan of reorganization with the court. A plan of reorganization is effectively a compromise between the debtor and their creditors. The plan sets forth how the debtor intends to reorganize operations to become profitable again and how the debtor proposes to repay creditors. The plan will also propose to reject and cancel certain contracts known as executory contracts, or those in which both parties still have duties to perform. Examples of executory contracts include collective bargaining agreements, vendor contracts, and real estate leases.
If all creditors approve the plan of reorganization, it is usually approved by the bankruptcy court. In a process known as cramdown, the bankruptcy court can approve the plan over the objection of certain creditors, provided the plan still meets the requirements of Chapter 11. Although a debtor has the exclusive right to propose a plan at the outset of the proceedings, if a plan is not adopted by a certain time, any party with an interest in the proceedings may propose an alternative plan.
