What Happens When a Business Files Chapter 11?

When a business files Chapter 11, it does not shut down. It keeps operating under federal bankruptcy court supervision while it restructures what it owes. The moment the petition hits the court, an automatic stay freezes nearly every collection effort against the company. The owners usually stay in charge as “debtor in possession,” running the business day-to-day while they negotiate a reorganization plan with creditors. If enough creditors accept the plan and the judge confirms it, the old debts are replaced by the plan’s payment terms and the company emerges with a restructured balance sheet. The whole process can take several months or stretch past a year, and it starts with a $1,738 filing fee before any attorney bills arrive.¹

The Automatic Stay Stops Collection Immediately

The single most important thing that happens at filing is the automatic stay. The second the petition is filed, nearly all collection activity against the business stops. Lawsuits freeze. Foreclosure proceedings halt. Creditors cannot repossess collateral, garnish bank accounts, or even make collection phone calls.² The stay gives the business breathing room to assess its situation and start planning a reorganization without creditors racing to carve up the assets.

The stay is not absolute. A creditor who believes it is being harmed can ask the court to lift the stay as to its collateral, but it has to show good cause. Until that happens, the business operates in a protected zone.

Within 14 days of filing, the business must also file detailed schedules listing all assets, liabilities, income, and expenses, along with a statement of financial affairs. Missing that deadline or filing inaccurate schedules can get the case dismissed or prompt the court to bring in an outside trustee.

Keeping the Lights On: First-Day Motions

A business that can’t pay its workers or keep the utilities running will fail long before anyone drafts a reorganization plan. That is why the first day of the case is usually a blur of emergency motions.

On the day the petition is filed, or within a day or two, the debtor’s attorneys flood the court with “first-day motions.” These are emergency requests for permission to handle basic operational needs that would otherwise be frozen by the bankruptcy filing. Common requests include authority to pay employee wages earned before the filing date, permission to maintain existing bank accounts and cash management systems, and approval to continue honoring customer deposits or warranty obligations. The court handles these on an expedited basis.

Who Runs the Business Now

In most Chapter 11 cases, no outside trustee takes over. The existing management keeps running day-to-day operations as the “debtor in possession,” holding nearly all the same powers and duties that a trustee would have.³ The one major carve-out: the debtor in possession does not investigate its own pre-filing conduct. That job falls to the creditors’ committee, or in cases involving suspected fraud, to a court-appointed examiner.

Running the company as a debtor in possession is not a free pass. It creates a fiduciary obligation to all creditors and the bankruptcy estate. Every business decision has to prioritize preserving value for the people owed money, not the owners. The business must file monthly operating reports with the U.S. Trustee documenting cash flow, taxes paid, and insurance coverage. Anything outside the ordinary course of business, like selling a major asset, taking on new debt, or terminating a significant contract, requires court approval first.

The stakes for misconduct are high. Concealing assets, falsifying financial records, or lying under oath during bankruptcy proceedings is a federal crime carrying up to five years in prison.⁴

Hiring Lawyers and Advisors Requires Court Approval

The business cannot simply keep using its existing lawyers and accountants without permission. Any professional the debtor wants to retain during the case, whether attorneys, financial advisors, or appraisers, must be approved by the court. The professional must be “disinterested,” meaning they do not hold or represent an interest that conflicts with the estate. A prior relationship with one creditor does not automatically disqualify someone, but if another creditor or the U.S. Trustee objects and shows an actual conflict, the court will reject the hire.⁵ Professional fees are paid from the estate as administrative expenses, giving them priority over most other claims. In large cases, these fees can run into the tens of millions of dollars.

Borrowing New Money During the Case

A business in Chapter 11 often needs new money to keep operating. Because no rational lender extends credit to a bankrupt company without special protections, the Bankruptcy Code provides a framework for debtor-in-possession (DIP) financing. The court can authorize new borrowing at several levels of protection for the lender, starting with ordinary unsecured credit and escalating to secured loans with liens on the debtor’s property.⁶

The most aggressive form of DIP financing involves “priming liens,” where the new lender gets a lien that leapfrogs ahead of existing secured creditors on the same collateral. Courts will only approve this when the debtor cannot get financing any other way and can provide “adequate protection” to the creditors being jumped in line. Adequate protection might mean additional collateral, periodic cash payments, or demonstrating a sufficient equity cushion in the property.

Creditors Organize Against You

Shortly after the case is filed, the U.S. Trustee appoints an official committee of unsecured creditors. This committee ordinarily consists of the seven largest unsecured creditors willing to serve.⁷ The committee acts as a watchdog for all unsecured creditors, not just its own members. It investigates the debtor’s pre-filing conduct, reviews financial records, and participates in negotiating the reorganization plan.

Committee members owe a fiduciary duty to the broader pool of unsecured creditors they represent. They have to put the interests of the creditor body ahead of their own company’s agenda. The committee is authorized to hire its own attorneys and financial advisors, paid from the debtor’s estate, which gives it real leverage. In practice, the committee’s support or opposition often decides whether a proposed plan succeeds. A plan the committee actively opposes faces an uphill battle at confirmation.

In smaller cases where the debtor doesn’t have enough unsecured debt to justify a formal committee, the U.S. Trustee may skip appointing one. Individual creditors then have to advocate for themselves.

Negotiating and Voting on the Reorganization Plan

The core of every Chapter 11 case is the reorganization plan, which spells out exactly how each class of creditors will be treated. For the first 120 days after filing, only the debtor can propose a plan. This “exclusivity period” gives the debtor leverage to negotiate without competing proposals. The court can extend exclusivity up to 18 months if the case is complex, or shorten it if the debtor is dragging its feet.⁸ Once exclusivity expires, any party in interest, including creditors and the committee, can file a competing plan.

Before anyone votes, the debtor must prepare a disclosure statement giving creditors enough information to make an informed decision. It covers the business’s history, why it ended up in bankruptcy, its current financial condition, projected future earnings, and a comparison showing what creditors would receive under the plan versus what they would get if the business were liquidated under Chapter 7.⁹ The court must approve the disclosure statement at a hearing before any ballots go out. If the document is too thin or misleading, the judge will send it back for revisions.

The plan itself must sort claims into classes based on their legal character. Secured claims, priority claims, general unsecured claims, and equity interests each go into separate classes. Within each class, every creditor must receive the same treatment. The plan identifies which classes are “impaired,” meaning their legal rights are being modified. A class that receives exactly what it is owed is “unimpaired” and is deemed to accept the plan automatically.

The Vote

After the court approves the disclosure statement, ballots go out to every impaired class. A class accepts the plan when creditors holding more than half the claims in number and at least two-thirds of the total dollar amount vote in favor.¹⁰ Only creditors who actually cast ballots count toward the tally, so voter apathy can work in the debtor’s favor.

Confirmation

Once voting is finished, the judge holds a confirmation hearing to evaluate whether the plan meets all the legal requirements. Two tests matter most:

Best interests test: Every individual dissenting creditor must receive at least as much as they would in a Chapter 7 liquidation. Even if a class voted to accept, any member who voted no is protected by this floor.¹¹
Feasibility test: The court must find that the debtor can actually make the promised payments without needing yet another restructuring. The judge reviews financial projections, market conditions, and the debtor’s track record to decide whether the plan is realistic.¹¹

Cramdown

If one or more classes reject the plan, the debtor still has a path forward. The court can confirm the plan over a dissenting class’s objection through a “cramdown,” provided the plan does not unfairly discriminate against the rejecting class and is “fair and equitable” toward it.¹¹ For secured creditors, that usually means they keep their lien and receive payments equal to the value of their collateral. For unsecured creditors, it means the absolute priority rule applies. Cramdown exists to prevent a single holdout class from killing a reorganization that benefits everyone else.

Who Gets Paid, and in What Order

The Bankruptcy Code sets a strict priority ladder, and no class can receive payment until every class above it has been satisfied in full or agreed to different treatment.¹² Simplified, the hierarchy works like this:

Domestic support obligations: Child support and alimony claims come first.
Administrative expenses: Costs of running the bankruptcy itself, including professional fees, post-filing wages, and the U.S. Trustee’s quarterly fees.
Gap-period claims: In involuntary cases, claims arising between the filing and the order for relief.
Employee wages: Up to $10,000 per person for wages earned within 180 days before filing.
Employee benefit contributions: Unpaid contributions to benefit plans, with limits.
Tax claims: Certain income, property, and employment taxes owed to government entities.

Secured creditors sit outside this ladder because their claims are tied to specific collateral. A secured creditor is entitled to be paid at least the value of its collateral, regardless of where unsecured claims rank. General unsecured creditors, including most trade vendors and contract counterparties, sit below all priority claims and often receive pennies on the dollar.

The Absolute Priority Rule

When a plan is forced on a dissenting class through cramdown, the “absolute priority rule” kicks in. The rule is simple in principle: no junior class can receive anything unless every senior class has been paid in full. In practice, this means existing owners cannot keep their equity stake if unsecured creditors are not being paid everything they are owed, unless those creditors agree to it.¹³ Owners who want to retain any interest in the reorganized company typically have to contribute new value, such as fresh capital, to justify their continued participation.

Selling Assets Along the Way

Not every major transaction waits for the reorganization plan. The business can sell assets outside the ordinary course of business at any point during the case, with court approval after notice and a hearing.¹⁴ These “363 sales” are common when the best asset is a going-concern business that will lose value if reorganization drags on.

The real power of a 363 sale is the ability to transfer property “free and clear” of existing liens and claims. A buyer gets clean title, which makes the asset far more valuable than it would be in an ordinary transaction weighed down by competing claims. The court can approve a free-and-clear sale when at least one of five conditions is met: applicable non-bankruptcy law permits it, the lienholder consents, the sale price exceeds the total value of all liens, the lien is in genuine dispute, or the lienholder could be forced to accept a cash payout in a separate legal proceeding. The proceeds replace the sold asset in the estate and get distributed according to the priority rules.

What Confirmation Actually Does to Your Debts

Once the court confirms the plan, it becomes a binding contract between the debtor and all creditors, replacing the old debts with the payment terms spelled out in the plan. For a business entity, confirmation itself triggers the discharge of all pre-filing debts, regardless of whether a creditor voted for the plan or even filed a claim.¹⁵ The company emerges with a restructured balance sheet and resumes normal operations.

Individuals who file Chapter 11 face a different rule. An individual debtor does not receive a discharge until all payments under the plan are actually completed, which can take years. And even then, debts that are non-dischargeable under the Bankruptcy Code, such as certain tax obligations, student loans, and debts arising from fraud, survive the Chapter 11 discharge just as they would in Chapter 7.

There is also an exception for liquidating plans. If the plan calls for selling off all of the business’s assets and the debtor does not continue in business afterward, the discharge does not apply if the debtor would have been denied a discharge under Chapter 7’s rules. This prevents a debtor from using Chapter 11’s liquidation track to dodge the stricter discharge restrictions that apply in Chapter 7.

Quarterly U.S. Trustee Fees Continue After Confirmation

Confirmation does not end the debtor’s financial obligations to the bankruptcy system. The business must pay quarterly fees to the U.S. Trustee for every calendar quarter between the filing date and the date the court finally closes the case. Starting April 1, 2026, the fee schedule under the Bankruptcy Administration Improvement Act of 2025 works as follows:¹⁶

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

These fees are administrative expenses with priority status, so they get paid before general unsecured creditors. As of September 30, 2025, the U.S. Trustee Program no longer accepts checks or money orders; all quarterly fee payments must be made electronically.¹⁶

When the Case Doesn’t End in Reorganization

Not every Chapter 11 case ends with a confirmed plan. When a reorganization is clearly not working, the court can convert the case to a Chapter 7 liquidation or dismiss it entirely, whichever better serves creditors.¹⁷ Any party in interest, including creditors, the U.S. Trustee, or the committee, can file a motion asking the court to pull the plug.

The statute lists a long catalog of situations that qualify as “cause.” The most common include:

Continuing losses with no realistic chance of recovery
Gross mismanagement of the estate
Failure to maintain insurance
Unauthorized use of cash collateral that harms creditors
Failure to file required reports or comply with court orders
Failure to pay post-filing taxes
Inability to confirm a plan within a reasonable time

The debtor itself can also voluntarily convert to Chapter 7 at any point, as long as it is still acting as debtor in possession and the case was not originally filed involuntarily. When a business realizes it is not salvageable, voluntary conversion is often the most honest and efficient exit. Once converted, a Chapter 7 trustee takes over, liquidates the remaining assets, and distributes the proceeds according to the priority ladder.

Faster Alternatives: Subchapter V and Pre-Packaged Cases

Traditional Chapter 11 was built for large corporate reorganizations, and the cost and complexity can crush a small business. Subchapter V, added in 2019, streamlines the process for debtors with total debts, secured and unsecured combined, at or below $3,024,725.¹⁸ A temporary increase to $7.5 million expired in June 2024, and the limit has returned to its original level as adjusted for inflation.

Several features make Subchapter V meaningfully different. A trustee is appointed in every Subchapter V case, but the role is closer to a mediator than a traditional Chapter 11 trustee. The Subchapter V trustee facilitates plan negotiations and oversees payments without taking control of the business. The debtor stays in possession. No creditors’ committee is appointed unless the court orders one for cause, which eliminates a major source of professional fees.

Plan confirmation is also easier. Only the debtor can file a plan, and it must do so within 90 days of filing. The court can confirm the plan even if no impaired class of creditors votes to accept it, which is not possible in a standard Chapter 11 cramdown. In exchange, the debtor must commit all projected disposable income over a three-to-five-year period to plan payments. The absolute priority rule does not apply in Subchapter V, so small business owners can retain their equity even when unsecured creditors are not being paid in full, as long as they are devoting their income to the plan.

Larger companies that know they need to file sometimes negotiate the plan with their major creditors before ever going to court. In a “pre-packaged” bankruptcy, the debtor solicits votes on the plan before filing, so the case enters court with enough acceptances already in hand to move straight toward confirmation. The entire bankruptcy can wrap up in weeks rather than months. A “pre-negotiated” bankruptcy is similar but stops short of collecting votes before filing. The debtor reaches agreement on key terms with its major creditors in advance, files the case, and then solicits votes through the normal disclosure process. Both approaches preserve going-concern value and limit the hemorrhaging of professional fees in large corporate cases.

1
United States Courts. Bankruptcy Court Miscellaneous Fee Schedule
2
Office of the Law Revision Counsel. 11 U.S.C. 362 – Automatic Stay
3
Office of the Law Revision Counsel. 11 U.S. Code 1107 – Rights, Powers, and Duties of Debtor in Possession
4
Office of the Law Revision Counsel. 18 U.S.C. 152 – Concealment of Assets, False Oaths and Claims, Bribery
5
Office of the Law Revision Counsel. 11 U.S. Code 327 – Employment of Professional Persons
6
Office of the Law Revision Counsel. 11 U.S. Code 364 – Obtaining Credit
7
Office of the Law Revision Counsel. 11 U.S.C. 1102 – Creditors and Equity Security Holders Committees
8
Office of the Law Revision Counsel. 11 U.S.C. 1121 – Who May File a Plan
9
Office of the Law Revision Counsel. 11 U.S.C. 1125 – Postpetition Disclosure and Solicitation
10
United States Courts. Chapter 11 – Bankruptcy Basics
11
Office of the Law Revision Counsel. 11 U.S.C. 1129 – Confirmation of Plan
12
Office of the Law Revision Counsel. 11 U.S. Code 507 – Priorities
13
Office of the Law Revision Counsel. 11 U.S. Code 1129 – Confirmation of Plan
14
Office of the Law Revision Counsel. 11 U.S.C. 363 – Use, Sale, or Lease of Property
15
Office of the Law Revision Counsel. 11 U.S.C. 1141 – Effect of Confirmation
16
U.S. Department of Justice. Chapter 11 Quarterly Fees
17
Office of the Law Revision Counsel. 11 U.S.C. 1112 – Conversion or Dismissal
18
U.S. Trustee Program. Subchapter V Small Business Reorganizations