What Is Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a type of bankruptcy in which the option of reorganization is made available to the business corporations, partnerships and individuals. Here, “reorganization” means continuing business and at the same time repaying the creditors as per an agreed repayment plan.


The case is generally filed by the company/business owner that wants time for restructuring and repaying its debts. The chapter 11 bankruptcy law gives sufficient time to the debtor to start afresh with the business and pay off the debt to the creditors. The debtor’s assets remain with the debtor and the business operations are continued under court’s supervision for the creditor’s benefit. If it is found that the debtor is dishonest or his/her management is not effective, the court may appoint a trustee to supervise the operations. The U.S. trustee generally appoints a committee of the creditors. The committee is the representative of all the creditors and it supervises the debtor’s operations as well as negotiates a plan for reorganization.

The chapter 11 bankruptcy law is flexible and offers more options than any other chapters. It is in fact very useful in case of smaller debts and in the case of real estate debts where the debtor needs time to catch up the previous due payments or time to sell off some property to raise money out of it. In general the aim is to give the debtor some time to make payment to the creditors and keep the business in running condition as well.

The chapter 11 bankruptcy law is beneficial for the debtors as it gives them relief in the form of:

  • Capability of objecting the creditor’s claims.
  • Ability to avoid liens.
  • Power to reject leases.
  • Authority to reject contracts without any penalty.
  • Right of extending the repayment term for the existing creditors.
  • Ability of even reducing the money owed or to be paid to the creditors.

However, do not think of bankruptcy as an easy way out of debt. It has some major disadvantages e.g. it has a very negative effect on your credit score (it remains on your credit report for 10 years) and makes it almost impossible for you to get loans in future.

Chapter 11 bankruptcy cost

Chapter 11 bankruptcy law is an expensive and time-consuming process. There are plenty of administrative burdens that have to be borne by you at all times. The process includes filing reports on a regular basis to the court and to the U.S. trustee’s office and even fees has to be paid on a regular basis. The chapter 11 bankruptcy cases usually last for a long time i.e. from several months to several years; and the professionals’ fees (attorney, accountant and C.P.A.) keeps on increasing at a rapid pace.

For filing chapter 11 bankruptcy, the following requirements should be met:

1. Means test – It is the first step and involves completing up a U.S. bankruptcy form 22B.

2. Petition – Filling out a complete petition is also one of the requirements of chapter 11 bankruptcy law.

3. Matrix of creditors – As per the U.S. Bankruptcy Code, the debtor has to list out all the creditors on the matrix of creditors.

4. Filling fee – The full fee has to be paid to the court at the time of filling the case or when the form 3A is submitted.

The basic purpose of a chapter 11 bankruptcy case is to get the court’s confirmation on the plan of “reorganization”. Getting the courts confirmation is just not a simple task; it involves a lot of complex formalities. This plan is actually a contract between the debtor and his creditors, stating how they will be repaid the debt and from what sources. There are various ways of formulating a successful plan, which fulfills the limitations and requirements of the Bankruptcy Code.

To finalize the plan the creditors are asked to vote in favor of the plan and if they fail to vote in the sufficient number they have to forcefully accept the plan, if the plan meets all the other requirements. Basically the key to success of a chapter 11 bankruptcy case is the pre-bankruptcy plan that has to be prepared. If the planning and implementation is done efficiently, the case would be successful.

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