Chapter 11 (Reorganization)
Bankruptcy proceeding under 11 U.S.C. §§ 1101-1195 in which a business (or individual) reorganizes its debts and operations under court supervision while continuing to operate. The debtor typically remains in possession (DIP) and proposes a Plan of Reorganization for creditor and court approval. Common for businesses with viable operations facing financial distress. The 2019 Small Business Reorganization Act added Subchapter V, streamlined Chapter 11 for small businesses (debt limit $7.5M post-CARES, with periodic adjustments).
Chapter 11 is the bankruptcy proceeding in which a business reorganizes its debts and operations under court supervision while continuing to operate. The debtor typically remains in possession (DIP, debtor-in-possession) rather than having a trustee appointed, and proposes a Plan of Reorganization for creditor and court approval. Chapter 11 is the principal bankruptcy framework for businesses with viable operations facing financial distress, providing breathing space, cramdown ability against dissenting creditors, contract rejection authority, and DIP financing access. Subchapter V (added 2019) provides streamlined Chapter 11 for small businesses.
Debtor-in-possession
In Chapter 11, the debtor typically remains in possession with management authority, operating the business as fiduciary for creditors. Section 1107 grants DIP the rights, powers, and duties of a trustee (with limited exceptions). DIP responsibilities: (1) operate business consistent with fiduciary duties; (2) provide reporting to creditors and US Trustee; (3) avoid preferential and fraudulent transfers; (4) exercise business judgment in routine matters; (5) seek court approval for non-ordinary-course transactions. Trustee appointment occurs only for cause (fraud, dishonesty, gross mismanagement, incompetence).
Exclusive plan period
Section 1121 grants debtor 120-day exclusive period to propose a plan (extendable by court up to 18 months from petition); 180-day exclusive period to obtain plan acceptance (extendable up to 20 months). After exclusivity expires, any party in interest may file competing plan. Exclusivity gives debtor leverage in plan negotiations; competing plans often signal failed reorganization. Most successful Chapter 11s confirm plan during exclusivity period.
Plan confirmation requirements
Section 1129 imposes plan confirmation requirements: (1) good faith; (2) compliance with Chapter 11 provisions; (3) feasibility, plan likely to succeed; (4) best interests test, each creditor receives at least as much as in Chapter 7 liquidation; (5) fair and equitable for non-consenting classes; (6) at least one impaired class consents; (7) absolute priority rule, unless cramdown exception applies, equity receives nothing if creditors not paid in full. Confirmation requires substantial plan-development work; many cases convert to Chapter 7 after failed plan attempts.
Cramdown, § 1129(b)
Cramdown allows confirmation over dissenting class objections if plan is "fair and equitable" to the dissenting class. Standards vary by claim type: (1) secured creditors, retain liens plus deferred cash payments equal to allowed claim, OR sale of collateral with lien attaching to proceeds, OR indubitable equivalent; (2) unsecured creditors, paid in full, OR junior classes receive nothing (absolute priority); (3) equity, paid in full, OR no junior class receives or retains anything. Cramdown is powerful but technical; sophisticated cases involve substantial cramdown analysis.
Subchapter V, small business stream
Small Business Reorganization Act of 2019 added Subchapter V for small business debtors. Key features: (1) debt limit, $7.5M (originally $2.7M; CARES Act expanded to $7.5M; expanded threshold has been periodically extended); (2) no creditor committee typically; (3) trustee appointed with limited role (oversight, distribution); (4) no absolute priority rule, equity can retain ownership without paying creditors in full; (5) shorter timeline, 90-day plan filing deadline (vs. 120 days standard); (6) debtor-only plan filing; (7) cramdown based on disposable income over 3-5 years. Subchapter V dramatically reduces Chapter 11 cost and complexity for small businesses.
Common Chapter 11 outcomes
Chapter 11 outcomes: (1) confirmed plan, successful reorganization; debtor emerges with restructured debt; (2) 363 sale, sale of substantially all assets to going concern buyer; common in distressed M&A; (3) conversion to Chapter 7, failed reorganization; trustee liquidation; (4) dismissal, case dismissed if no progress or for cause; (5) structured dismissal, negotiated dismissal with creditor distributions outside plan. Many filings are pre-arranged or pre-packaged with substantial creditor agreement before petition filing.
For Texas businesses considering Chapter 11, planning before filing is critical. Best practice: (1) engage experienced bankruptcy counsel and financial advisor pre-petition; (2) prepare 13-week cash flow forecast and DIP financing strategy; (3) identify executory contracts to assume or reject; (4) develop reorganization plan thesis before filing; (5) for small businesses (debt under $7.5M), evaluate Subchapter V eligibility, substantially less expensive; (6) consider pre-packaged or pre-arranged Chapter 11 with creditor agreements; (7) for distressed M&A, evaluate 363 sale strategy. For creditors: (1) file proof of claim timely; (2) participate in creditor committee where appointed; (3) evaluate plan treatment carefully; (4) preserve rights through stay relief motions where appropriate.