Chapter 11 refers to the United States bankruptcy code that allows for reorganization.
It is equally application to both individuals and businesses. However, it is rarely used by the former. Businesses are eligible whether they are a corporation, partnership, or sole proprietorship.
This is a federal statute which means all filings take place in U.S. Federal Court.
When a company is unable to service its debts or pay its creditors, it can seek relief from the court. Under Chapter 11, the company continues to operate as a debtor in possession with oversight being provided.
There are three possible outcomes:
- reorganization
- conversion to Chapter 7
- dismissal
Under reorganization, the company files a plan with the court. This must be approved by all creditors along with the court. There are certain requirements which must be met as well as the plan must be feasible. It all are in agreement on these points, then the plan moves ahead.
Chapter 7 is in contrast to this whereby the assets of the company are liquidated to meet the obligations. Here the creditors line up to be compensated based upon the net sale of the assets.