Chapter 11 is commonly referred to as a “reorganization bankruptcy.” Chapter 11 is typically used to reorganize a business such as a corporation, limited liability company, partnership, or proprietorship, although individuals may sometimes proceed under this chapter. In Chapter 11, the debtor seeks to “reorganize” its debts by extending the time available to pay the debts to its creditors and by reducing the total amount of the debts to be paid.
In Chapter 11, the debtor remains in possession of its assets (becoming the “Debtor in Possession”) and operates the business under the supervision of the bankruptcy court, for the benefit of the creditors and the on-going business. Because the Debtor in Possession is a fiduciary to the creditors, the Debtor in Possession must adhere to high standards and duties. Thus, if the Debtor in Possession’s management becomes inefficient or ineffective, or if the Debtor in Possession breaches its fiduciary duties, the bankruptcy court may appoint a trustee or examiner to step in and manage the business.
Central to Chapter 11 is the debtor’s reorganization plan that sets forth the business’s reorganization and lays out how, when, and in what amount each creditor will be paid. Unlike the other bankruptcy chapters, the creditors in Chapter 11 are able to vote on whether to accept or reject the debtor’s plan. If the required amount of creditors accepts the plan, the bankruptcy court will then hold a confirmation hearing to determine whether to confirm the plan. Once the plan is confirmed, the Debtor in Possession is “discharged” and is required to complete the confirmed plan as outlined.