Chapter 11 bankruptcy is a bankruptcy procedure in which a debtor’s business affairs and assets are reorganized.  Chapter 11 bankruptcy is afforded to all business entities whether it is a corporation, sole proprietorship or individual.  However, it is most prominently used by corporate entities. When a business entity is unable to service its debt or pay its creditors, it can file with a federal bankruptcy court for protection under Chapter 11.

To commence a Chapter 11 bankruptcy case, a voluntary petition is filed by the debtor with the court.  Along with the petition, a schedule of assets and liabilities and a statement of financial affairs should be filed.

In chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business.  In most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.

Chapter 11 gives the debtor in possession several means to restructure its business.  A debtor in possession can obtain financing and loans on favorable conditions by giving new lenders first priority on the earnings of the business.  The court may also allow the debtor in possession to decline and cancel contracts.  Debtors are also defended from other proceedings against the business through the automatic stay provision.  While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.