What is Chapter 11, Anyway?
What are the consequences of a Chapter 11 filing? What does it mean to be a “debtor in
possession”? If all of the assets are covered by liens, how does the Chapter 11 debtor get
the cash to keep operating? How can the Chapter 11 debtor deal with contracts-favorable
and unfavorable? How can secured debt be restructured under a Chapter 11 plan? How
about unsecured claims? What’s a pre-packaged or pre-negotiated Chapter 11?
Chapter 11 allows a company to remain in business while it addresses its financial problems.
Chapter 11 is based upon the economic premise that a business, even though not currently able
to meet its obligations, can often be restructured so that creditors and stockholders would receive
more from future profits (or a sale of the restructured company) than from a forced liquidations of
assets by a bankruptcy trustee under Chapter 7 of the Bankruptcy Code. Chapter 11 can also
maintain employment and other economic benefits for the community where the debtor company
operates. An ailing company will typically consider Chapter 11 of its business, or some portion of
it, is likely to be worth substantially more as a going concern than on the auction block. Chapter
11 can also be used as an orderly way to liquidate a company’s assets and wind up its affairs.
Commencement of Chapter 11 Reorganization
A Chapter 11 reorganization begins when a company files a petition and various related
documents with the United States Bankruptcy Court. The immediate result of the Chapter 11
petition is to impose the “automatic stay.” The automatic stay is the equivalent of a court order
freezing all debts of the company and preventing creditors from demanding payment, bringing
lawsuits, seizing assets or engaging in any other kind of collection activity. The purpose of the
automatic stay is to preserve the status quo while the company and its creditors negotiate the
terms upon which pre-Chapter 11 debts will be settled. The proposed terms of settlement