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Chapter 11 bankruptcy is a type of bankruptcy that is available to both individuals and companies. Generally, Chapter 11 is used by businesses. A Chapter 11 bankruptcy case is known as a reorganization because unlike in a Chapter 7 liquidation, the business continues to operate for the benefit of creditors.
Debtor in Possession
The debtor in possession is the company filing for Chapter 11 bankruptcy that remains in possession of assets and runs the business in an attempt to earn income which can be used to pay back creditors.
Creditors Committee
During a Chapter 11 bankruptcy case, the U.S. trustee will appoint a creditors committee from among the 20 largest unsecured, non-insider creditors. The committee will represent the interests of the creditors.
The Chapter 11 Plan
The Chapter 11 plan determines how the various classes of creditors will be paid from future earnings of the business. The plan is voted on by creditors but can be imposed by the court under certain conditions.
Benefits
Chapter 11 is a flexible chapter and it allows for the business to continue doing business, which will often benefit creditors, the debtor company and its employees.
Conversion to Chapter 7
If a business cannot succeed with its Chapter 11 reorganization plan, the bankruptcy may be converted to a Chapter 7 liquidation, and this frequently occurs.
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