Chapter 11 bankruptcy is
“reorganization” bankruptcy, which allows debtor organizations to enjoy
bankruptcy protection while continuing to operate. While available to
individuals, it is typically used by business organizations.
A Chapter 11 bankruptcy starts like any other bankruptcy, with the debtor filing a petition and listing its assets and debts. Instead of liquidation, though, the proceeding next moves to a negotiation phase, where the debtor negotiates terms with classes of creditors (classes of creditors may, for example, include employees owed back wages, vendors and banks). These negotiations can take months and often require court intervention.
If all classes of creditors approve a plan agreed to by the debtor, the company can carry out the plan and come out of bankruptcy. Even if some classes of creditors refuse the plan, a court may “cram down” the plan if the court believes it if a fair and reasonable one.
If the negotiations do not work, the proceeding can be converted (either voluntarily or upon motion by a creditor) to a Chapter 7 liquidation.