Chapter 11 Bankruptcy: Reorganization Plan, Cramdown, and Discharge

Chapter 11 bankruptcy is a court-supervised reorganization that lets a business keep operating while it restructures its debts, instead of shutting down and selling off its assets. The process centers on a reorganization plan that spells out how the company will pay creditors over time, funded by future earnings, asset sales, new investment, or some combination. Filing freezes lawsuits and collection activity immediately, giving the business room to negotiate. The court filing fee totals $1,738, but professional fees and quarterly payments to the U.S. Trustee’s office push the real cost of Chapter 11 far above that number.¹²

Who Can File

Corporations, partnerships, and limited liability companies are the typical filers. Federal law allows any “person” with a residence, place of business, or property in the United States to file, and the Bankruptcy Code defines “person” broadly enough to cover most business structures.³ Stockbrokers and commodity brokers are specifically excluded, and banks and insurance companies are handled through separate regulatory frameworks rather than bankruptcy court.⁴

Individuals can also file Chapter 11, and sometimes have no other option. Chapter 13 caps eligibility at $526,700 in unsecured debt and $1,580,125 in secured debt.⁵ Someone whose debts exceed those limits but who wants to reorganize rather than liquidate ends up in Chapter 11. That path is common for people with significant real estate holdings or business debts tied to personal guarantees.

Filing Documents and Upfront Costs

A business files Official Form 201, the Voluntary Petition for Non-Individuals, while an individual uses Form 101.⁶ The petition is short. The supporting paperwork is not. Along with the petition, the debtor files schedules of assets and liabilities, a statement of financial affairs with recent transactions and payments, a list of the twenty largest unsecured creditors, a schedule of ongoing contracts and leases, and a statement of current income and expenses.

Every creditor’s name, address, and claim amount must be listed precisely, with notations for debts that are disputed or uncertain. Errors here cause problems later when creditors challenge how they are treated under the plan.

The $1,738 filing fee breaks down into a $1,167 statutory filing fee and a $571 administrative fee.² Attorney fees in Chapter 11 routinely run into five figures for small businesses and can reach hundreds of thousands for complex cases.

The Automatic Stay

The moment the petition is filed, an automatic stay freezes almost all collection activity against the business.⁷ Lawsuits stop. Foreclosures halt. Creditors cannot seize bank accounts, repossess equipment, or shut off utilities over unpaid prepetition bills. For many businesses, this is the single reason to file when they do rather than wait.

The stay has limits. Government agencies can still exercise regulatory and police powers, conduct tax audits, issue deficiency notices, and make tax assessments.⁷ Securities enforcement continues. A creditor with a lien on specific collateral can ask the court to lift the stay by showing the debtor has no equity in the property or that the property isn’t necessary for reorganization.

Running the Business as Debtor in Possession

In most Chapter 11 cases, existing management keeps running the company. The Bankruptcy Code calls this the “debtor in possession,” and it gives leadership roughly the same powers a court-appointed trustee would have.⁸ The reasoning is that the people who know the business best are usually the ones most capable of turning it around.

That authority comes with duties. The debtor in possession owes a fiduciary duty to the bankruptcy estate, meaning it must act in the collective interest of creditors rather than just the owners. In practice, that means filing monthly operating reports with the U.S. Trustee showing cash flow, expenses, and the status of estate assets. Missing those reports or filing inaccurate numbers is one of the quickest ways to lose control of the case.

If management commits fraud, engages in gross mismanagement, or proves incompetent, the court can remove them and appoint an independent trustee.⁹ Trustee appointments are relatively rare, because most debtors understand that losing control of the case means losing control of the outcome.

The Exclusivity Period

For the first 120 days after filing, only the debtor can propose a plan.¹⁰ After that, creditors, equity holders, and other parties can submit competing proposals. The debtor then has 60 more days (180 total from filing) to secure acceptance of its plan before the field opens up. Courts can shorten or extend both deadlines, but the exclusivity period cannot be stretched beyond 18 months after filing.

The Reorganization Plan

Everything in a Chapter 11 case builds toward the plan. It lays out how the business intends to handle each category of debt.¹¹ Plans typically span three to five years and identify where the money will come from: future profits, selling off non-core assets, new investment, or some combination.

Similar claims must be grouped into classes. Secured creditors holding collateral form one class; general unsecured creditors another; equity holders yet another. For each class, the plan specifies the treatment, which might be full payment, partial payment, extended timelines, debt-for-equity swaps, or something else. Classes whose rights are being altered are “impaired,” and those creditors get to vote.

Priority Claims

Certain debts move to the front of the line by statute. Administrative expenses of the bankruptcy itself, like attorney and accountant fees, must be paid in full on the plan’s effective date unless the creditor agrees otherwise.¹² Employee wages earned within 180 days before filing receive priority treatment up to $17,150 per worker, with a similar cap for contributions to employee benefit plans.¹³ Taxes also receive priority status. A plan that doesn’t provide for full payment of these priority claims won’t be confirmed unless the affected creditor agrees.

The Absolute Priority Rule

When a plan is forced on a rejecting class through cramdown, the absolute priority rule applies. Shareholders cannot keep their ownership stake unless every senior class of creditors is paid in full. If unsecured creditors are getting 60 cents on the dollar, the old equity holders get nothing. The rule only governs cramdown situations where at least one impaired class voted no. If every class accepts voluntarily, it doesn’t apply.

The Disclosure Statement and Creditor Voting

Before creditors vote, they receive a disclosure statement the court must approve first.¹⁴ It contains the business’s history, a description of how the plan works, financial projections, and a liquidation analysis showing what creditors would get if the company were simply shut down and sold off in Chapter 7. That comparison is the document’s most important function. If creditors would do better under liquidation, the plan has a problem.

The disclosure statement must also lay out the risks: pending lawsuits, industry headwinds, dependence on key customers, regulatory exposure, anything that could prevent the company from making the promised payments. Courts reject disclosure statements that paint an unrealistically rosy picture.

Once the court approves the disclosure statement, it goes to creditors with the plan and a ballot. Each impaired class votes separately. A class accepts the plan when creditors holding at least two-thirds of the dollar amount of claims in that class vote yes, and more than half of the individual creditors who vote cast ballots in favor.¹⁵ Both thresholds must be met. Voting typically runs 30 to 60 days.

Confirmation and Cramdown

After the votes are counted, the court holds a confirmation hearing. The judge reviews whether the plan satisfies every requirement in the Bankruptcy Code: compliance with the statute, good faith, feasibility, and the “best interests” test, which ensures no creditor receives less than it would in a Chapter 7 liquidation.¹² The plan must also show the company can realistically make the payments it promises.

If one or more impaired classes vote no, the debtor can still seek confirmation through cramdown. The court can force the plan on dissenting classes if at least one impaired class accepted it (not counting insider votes), the plan doesn’t unfairly discriminate between classes of equal priority, and it is “fair and equitable” to the rejecting class.¹² For secured creditors, “fair and equitable” means receiving at least the value of their collateral. For unsecured creditors, it means no junior class receives anything unless unsecured creditors are paid in full.

Once confirmed, the plan binds the debtor, all creditors, and equity holders regardless of how any individual creditor voted. The confirmation order replaces whatever contractual rights existed before with the terms spelled out in the plan.

Ongoing Quarterly Fees

Every Chapter 11 debtor pays quarterly fees to the U.S. Trustee’s office for as long as the case stays open. The fee is based on the amount the business disburses each quarter:¹⁶

$0 to $62,624 in disbursements: $250
$62,625 to $999,999: 0.4% of quarterly disbursements
$1,000,000 to $27,777,722: 0.9% of quarterly disbursements
$27,777,723 or more: $250,000

The $250 minimum applies even in quarters with zero disbursements, and fees are not prorated for partial quarters. Payments are due within one month after each calendar quarter ends and must be made electronically through Pay.gov. Falling behind on quarterly fees is a specific ground for converting or dismissing the case.¹⁶

Subchapter V for Small Businesses

Standard Chapter 11 is expensive and slow. Congress created Subchapter V in 2019 for small business debtors, and the differences are significant. To qualify, a business must have no more than $3,024,725 in total debts, excluding debts owed to insiders or affiliates.¹⁷

The streamlining cuts out the most expensive parts of a standard case. There’s no creditors’ committee unless the court orders one for cause. The disclosure statement requirement can be waived. The debtor must file a plan within 90 days of filing, keeping the case from dragging on.¹⁸ Only the debtor can propose a plan; creditors cannot file competing plans.

Every Subchapter V case has a trustee, but the role is different from a standard Chapter 11 trustee. The Subchapter V trustee acts as a facilitator, working with the debtor and creditors to develop a consensual plan, monitoring financial reporting, and appearing at key hearings. If a plan is confirmed over creditor objections through cramdown, the trustee collects payments from the debtor and distributes them to creditors.¹⁹

For a small business under the debt threshold, Subchapter V is almost always the better option. The lower cost and shorter timeline make successful reorganization realistic for companies that would otherwise burn through remaining cash just paying for the standard process.

Discharge

Discharge works differently for business entities and individuals. For corporations and partnerships, discharge happens when the court confirms the plan. Confirmation wipes out all prepetition debts, whether or not a creditor filed a claim and regardless of how any creditor voted.²⁰ Those debts are replaced by the obligations the plan creates.

Individual debtors face a higher bar. Discharge generally doesn’t happen until the debtor completes all plan payments.²⁰ Even then, certain debts survive bankruptcy entirely, including alimony, child support, most student loans, debts from drunk-driving injuries, and debts from willful and malicious conduct.¹⁵

When a Case Fails

Not every reorganization works. When a business can’t make its plan pencil out, the court can either convert the case to Chapter 7 liquidation or dismiss it, whichever better serves creditors.²¹ Any party in interest can ask for it, including creditors, the U.S. Trustee, and the debtor itself.

The statute lists more than a dozen grounds that qualify as “cause,” and many come down to the debtor not doing what the process requires. Continuing losses with no realistic turnaround. Missed operating reports. Unpaid post-filing taxes or quarterly fees. Gross mismanagement of the estate, like unauthorized use of cash collateral or failing to maintain insurance. Inability to file a plan on time, secure confirmation, or carry out a confirmed plan’s terms.

Conversion to Chapter 7 means a trustee takes over, sells the business’s assets, and distributes proceeds under the statutory priority scheme. Dismissal puts the debtor back where it started, without bankruptcy protection, and creditors are free to resume collection. A confirmed plan can also unravel: if the debtor defaults on plan payments or can’t achieve substantial consummation, those failures are independent grounds for conversion or dismissal.²¹ Confirmation is a milestone, not a finish line.

1
Office of the Law Revision Counsel. 28 U.S.C. 1930 – Bankruptcy Fees
2
United States Courts. Bankruptcy Court Miscellaneous Fee Schedule
3
Office of the Law Revision Counsel. 11 U.S.C. 109 – Who May Be a Debtor
4
Office of the Law Revision Counsel. 11 U.S.C. 109 – Who May Be a Debtor
5
United States Courts. Chapter 13 – Bankruptcy Basics
6
United States Courts. Official Form 201 – Voluntary Petition for Non-Individuals Filing for Bankruptcy
7
Office of the Law Revision Counsel. 11 U.S.C. 362 – Automatic Stay
8
Office of the Law Revision Counsel. 11 U.S.C. 1101 – Definitions for This Chapter
9
Office of the Law Revision Counsel. 11 U.S.C. 1104 – Appointment of Trustee or Examiner
10
Office of the Law Revision Counsel. 11 U.S.C. 1121 – Who May File a Plan
11
Office of the Law Revision Counsel. 11 U.S.C. 1123 – Contents of Plan
12
Office of the Law Revision Counsel. 11 U.S.C. 1129 – Confirmation of Plan
13
Office of the Law Revision Counsel. 11 U.S.C. 507 – Priorities
14
Office of the Law Revision Counsel. 11 U.S.C. 1125 – Postpetition Disclosure and Solicitation
15
United States Courts. Chapter 11 – Bankruptcy Basics
16
United States Department of Justice. Chapter 11 Quarterly Fees
17
United States Department of Justice. Subchapter V
18
Office of the Law Revision Counsel. 11 U.S.C. 1189 – Filing of the Plan
19
United States Department of Justice. Handbook for Small Business Chapter 11 Subchapter V Trustees
20
Office of the Law Revision Counsel. 11 U.S.C. 1141 – Effect of Confirmation
21
Office of the Law Revision Counsel. 11 U.S.C. 1112 – Conversion or Dismissal