Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is commonly thought of as being used by large corporations (American Airlines) to reorganize themselves when facing financial difficulty. It allows the entity to reorganize itself while under court protection. The company can retain assets and control of itself while dealing with creditors and seeking solutions to its problems.
Chapter 11 relief is also available to small businesses and individuals. We most commonly use Chapter 11 when a small corporation is having difficulty. Many options to help a business are available. I think of the filing of a Chapter 11 as creating a protective environment for the business or individual to work out deals with creditors. The best examples I can think of involve the restructuring of vehicle and equipment notes. The bankruptcy code allows the Debtor to pay outstanding Internal Revenue Debts over a five year with modest interest. This time might be extended (VERY rarely) if the IRS will agree to it.


A Chapter 11 bankruptcy case commences with the filing of a Petition. The filing of the petition acts as an automatic injunction against all collection activities by creditors. Very few exceptions exist to this rule. Schedules must be filed with or not very long after the petition is filed. Schedules are documents that will list all of the debtor’s debts and assets. Detailed financial information about the debtor’s operations must also be provided. A debtor is called a “debtor in possession” meaning that the debtor retains full control over the company. The company can continue to operate in a relatively normal fashion.


As soon as a Chapter 11 petition is filed, an entity called the Office of the United States Trustee gets involved in monitoring the case. There is an initial interview with them after the case is filed. They will inform you that you need to open a special bank account to run your business from while you are in the case. It is called a Debtor in Possession account. Most major banks offer this service. You will also be required to submit a monthly operating report to the US Trustee. This is not too onerous of a task. They are always very willing to help people to understand the reporting and with the forms.
If your cash receivables are pledged to a bank or other lender as collateral, you MAY NOT use these funds without filing a Motion To Use Cash Collateral with the court and having it approved. Also, some creditors may seek interim payments on their debts pending approval of a plan to offset depreciation and so forth. These are called “adequate protection payments”.

Goal of the Chapter 11:

The goal of the Chapter 11 is to (1) formulate a plan of reorganization within 180 days of filing the case. (2) Get the plan approved by enough creditors to get it approved and confirmed and (3) Close the case. If this is unsuccessful, the alternative is to shut the business down and convert the case to a Chapter 7 case. In that event, a Chapter 7 trustee will be appointed to liquidate the assets and pay the creditors as best they can.