Chapter 11

Under Chapter 11, a company can seek protection from its creditors while it develops a plan to restructure. An automatic stay stops most creditors from collecting debts or seizing assets during the process. Management usually remains in control, as a debtor in possession.

The company proposes a reorganisation plan, which may reduce debts, convert debt into equity, close unprofitable operations or sell assets. Creditors vote on the plan by class, and the court can approve it even if some classes object, under certain conditions, a process called a cramdown.

For example, an airline in Chapter 11 might keep flying while it renegotiates aircraft leases, labour contracts and debts, then emerge from bankruptcy with a stronger balance sheet. Several major US airlines and carmakers have used Chapter 11.

Chapter 11 can save viable businesses, but it is expensive and time-consuming, and shareholders are often wiped out. It differs from Chapter 7, under which a company is liquidated. Other countries have their own processes, such as administration and restructuring plans in the United Kingdom.