Chapter 11 is a reorganization proceeding. It is typically used by businesses, but also may be used by individuals who do not qualify for chapter 13 because of their substantial debts and because they have assets that would be surrendered in a chapter 7 proceeding. The purpose of a chapter 11 proceeding is to provide the debtor with temporary relief from pre-petition debts while the debtor formulates a plan to restructure those debts in accordance with certain requirements of the Bankruptcy Code. In a chapter 11 proceeding, the debtor remains in operation (in the case of a business) and remains in possession and in control of all owned property.
A typical chapter 11 debtor is an otherwise viable business that is temporarily overwhelmed by cash flow problems. Over the past 10 years, numerous well known entities, including major airlines and department stores, have filed for chapter 11 protection.
Individuals may also file for relief under chapter 11. Any person who is eligible to file a petition under chapter 7 is also eligible to file a petition under chapter 11, except for stockbrokers and commodities brokers. Railroads, which are ineligible to file for chapter 7 relief, may file for relief under chapter 11.
Unlike a chapter 7 proceeding, a chapter 11 debtor does not surrender any pre-petition property since the chapter 11 debtor continues with its pre-petition operations. During the course of the chapter 11 proceeding, the chapter 11 debtor must remain current on all post-petition obligations. During the chapter 11 proceeding, the debtor may examine all leases and other contractual relationships and can reject or terminate certain of those relationships if they are deemed not profitable.
The restructuring of the debtor’s pre-petition obligations is embodied in a plan of reorganization. The plan, once confirmed, has the effect of discharging the debtor from pre-petition obligations. Essentially, the plan serves as a contract between the debtor and its pre-petition creditors, substituting plan payment obligations for the discharge of pre-petition obligations.
The plan sorts creditors into classes. Similarly situated creditors are classified together. Secured and general unsecured claims, for example, are generally classified separately. Wage claims are classified as “priority.” Creditors have the right to vote to accept or reject the proposed plan. In addition, the plan must be approved by the bankruptcy court.
