A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. Individuals may file a Chapter 11 for those whose debts exceed the limits of Chapter 13.
The purpose of a Chapter 11 bankruptcy is to allow a business a limited amount of time free from creditor collection efforts and lawsuits to restructure its finances so it may continue to operate under a court approved plan. In Chapter 11, the debtor usually remains in possession of its assets and continues to operate its business. The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization. A business may also choose to liquidate under this type of bankruptcy. If a business obtains approval from the court for its plan, all pre-bankruptcy debts will be discharged. A business will not receive a discharge if it simply liquidates its assets under a plan.
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