Chapter 11 lets businesses restructure debts while continuing to operate. A streamlined version called Subchapter V makes this accessible to small businesses.
Chapter 11 is a reorganization bankruptcy governed by 11 U.S.C. Chapter 11. It allows a business -- or, in some cases, an individual -- to continue operating while restructuring debts under court supervision. The debtor proposes a reorganization plan that specifies how each class of creditors will be treated. If the court confirms the plan, the debtor pays according to its terms and emerges from bankruptcy as a going concern.
Unlike Chapter 7, which liquidates the business, Chapter 11 is designed to preserve it. The debtor usually stays in control as a "debtor in possession" and continues running day-to-day operations during the case.
Chapter 11 is available to businesses of any size, from sole proprietorships to publicly traded corporations. Individuals who exceed the debt limits for Chapter 13 can also file Chapter 11. There is no debt ceiling.
Common Chapter 11 filers include:
The debtor files a petition and typically retains control of the business as debtor in possession. The process involves several key phases:
The Small Business Reorganization Act of 2019 added Subchapter V to Chapter 11, creating a streamlined process for small business debtors with total debts below a specified threshold (currently $7.5 million as extended).
No creditors' committee -- reduces cost and complexity. Trustee facilitates, does not replace management -- the debtor stays in control. No absolute priority rule -- equity holders can retain interests even if unsecured creditors are not paid in full, provided the plan is fair and equitable. Faster confirmation -- the debtor has 90 days to file a plan. Cramdown without creditor acceptance -- the debtor can confirm a plan under Section 1191(b) even if no creditor class votes to accept.
Subchapter V has made Chapter 11 viable for small businesses that previously could not afford the cost or complexity of traditional Chapter 11.
| Chapter 11 | Chapter 7 | Chapter 13 | |
|---|---|---|---|
| Purpose | Reorganize and continue | Liquidate and close | Repayment plan |
| Who can file | Businesses and individuals | Businesses and individuals | Individuals only |
| Debt limits | None | None | $2.75M combined |
| Cost | Higher (attorney fees, trustee fees) | Lower | Moderate |
| Business continues | Yes | No (entity dissolved) | N/A (individuals) |
If you are an individual considering Chapter 11, it is typically because your debts exceed the Chapter 13 limits. Individual Chapter 11 cases work similarly to Chapter 13 but with more procedural requirements and higher costs. Consult a bankruptcy attorney to determine whether Chapter 11 or Chapter 13 is appropriate for your situation.
In most Chapter 11 cases, the debtor continues to manage the business as a "debtor in possession" (DIP) under Section 1107. The DIP has most of the powers and duties of a trustee but is essentially the same management team that was running the business before the filing.
As DIP, the debtor can:
However, the DIP is subject to heightened fiduciary duties. The business is no longer operated solely for the benefit of its owners -- it must act in the interest of all creditors and the bankruptcy estate. Extraordinary transactions, such as selling major assets outside the ordinary course of business or borrowing new money, require court approval.
If the debtor mismanages the estate, engages in fraud, or fails to comply with court orders, the court may appoint a Chapter 11 trustee to replace management. This is relatively rare but serves as an important check on debtor conduct.
In traditional (non-Subchapter V) Chapter 11 cases, the U.S. Trustee typically appoints an official committee of unsecured creditors under Section 1102. This committee represents the interests of all unsecured creditors in the case.
The committee has the right to:
Committee professionals add significant cost to a Chapter 11 case, which is one reason Subchapter V eliminates the committee requirement for small businesses. In larger cases, the committee plays a critical role in negotiating plan terms and ensuring that creditors receive fair treatment.
Section 1129 sets the requirements for confirming a Chapter 11 plan. The plan must satisfy all applicable provisions, including:
If not all impaired classes accept the plan, the debtor can seek "cramdown" confirmation under Section 1129(b). Cramdown requires that the plan does not discriminate unfairly and is fair and equitable with respect to each dissenting impaired class. For secured creditors, this generally means the plan pays at least the value of the collateral. For unsecured creditors, the absolute priority rule requires that no junior interest (such as equity holders) receive anything unless senior classes are paid in full -- though Subchapter V eliminates this requirement.
Although Chapter 11 is primarily associated with business reorganizations, individuals file Chapter 11 in several situations:
Individual Chapter 11 cases are subject to some provisions that do not apply to business debtors, including the means test (in some circuits) and the requirement that post-petition earnings be included in the bankruptcy estate. The cost of an individual Chapter 11 -- typically $15,000 to $50,000 or more in attorney fees -- means it is generally only practical when the debt amounts justify the expense.
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