Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a form of US federal bankruptcy protection that allows a financially distressed company to continue operating while it reorganizes its debts and business operations under court supervision, with the goal of emerging as a viable going concern.
Chapter 11 of the US Bankruptcy Code provides companies with a court-supervised process to restructure their obligations while keeping the business running. Unlike Chapter 7, which liquidates assets to repay creditors, Chapter 11 is a reorganization process intended to preserve going-concern value. The premise is that a viable business is worth more as a continuing operation than as a collection of liquidated assets, and that reorganization allows that value to be preserved for creditors, employees, and other stakeholders.
When a company files for Chapter 11, it becomes the 'debtor in possession' — it continues to operate its business under the supervision of the bankruptcy court, subject to court approval for transactions outside the ordinary course of business. The filing triggers an automatic stay, which immediately halts all creditor collection actions, foreclosures, lawsuits, and debt enforcement proceedings, giving the company breathing room to develop a restructuring plan.
The reorganization process revolves around a plan of reorganization — a comprehensive blueprint for how the company will restructure its liabilities. The plan specifies which creditors will be paid in full, which will receive partial payment (often in the form of equity in the reorganized company), which contracts will be assumed or rejected, and what the post-emergence capital structure will look like. Creditors are organized into classes based on their legal rights, and each class votes on whether to accept the plan. A class accepts the plan if two-thirds in dollar amount and more than half in number of creditors in that class vote in favor.
If all impaired classes accept the plan, the court confirms it. If some classes reject the plan, the debtor may still seek 'cramdown' — confirmation over the objection of dissenting classes — if the plan is fair and equitable to dissenting classes and does not discriminate unfairly. The absolute priority rule governs cramdown: senior creditors must be paid in full before junior creditors receive anything, and creditors must be paid in full before equity holders retain any value.
Chapter 11 filings have significant market implications for publicly traded companies. Equity value is often wiped out entirely when a company emerges from bankruptcy, as the reorganized equity is issued to former creditors. Pre-petition shares typically become worthless, a fact that does not prevent speculative trading of distressed equity in the market during the case.