What Is Restructuring Law and How Does It Work?

Restructuring law is the set of federal bankruptcy rules and contract principles that lets a business in serious financial trouble renegotiate what it owes instead of shutting down. In the United States, the core of it is Chapter 11 of the Bankruptcy Code, which allows a company to keep operating while it works out a plan to pay creditors on new terms. Businesses can also restructure privately through negotiated agreements with lenders and vendors, without ever filing in court. Which route makes sense depends on how many creditors are involved, how cooperative they are, and how much time the company has.

Fixing Debt Problems Without Filing

Many businesses try to resolve debt trouble privately before going anywhere near a courthouse. These out-of-court workouts run on ordinary contract law: the company and its creditors sit down and negotiate new terms. Done well, they are faster, quieter, and far cheaper than a bankruptcy case.

Two structures come up repeatedly. In a composition agreement, creditors accept a percentage of what they’re owed as full payment. A vendor might take sixty cents on the dollar now rather than gamble on a court process that could pay less years later. An extension agreement stretches the repayment schedule without necessarily cutting the principal, and often travels with an intercreditor agreement that spells out how different lenders share payments.

The weakness of any private workout is unanimity. Every affected creditor has to agree, and a single holdout can kill the deal. When that happens, formal bankruptcy is usually the only remaining path.

How Chapter 11 Works

Chapter 11 is where most substantial corporate restructurings happen. The company files a petition and, in most cases, keeps running its business as a “debtor in possession.” Existing management stays in place, but with a shift in legal duty: the company now carries the same obligations as a bankruptcy trustee, including a duty to act in the best interest of the estate and its creditors rather than just its shareholders.¹

The debtor also gets first crack at drafting the reorganization plan. For 120 days after filing, only the debtor can propose one. If the debtor also secures creditor acceptance within 180 days, no competing plan can be filed. Courts can extend both windows, but the exclusivity period for filing cannot exceed 18 months, and the acceptance period cannot exceed 20 months.²

Oversight and the Creditors’ Committee

The United States Trustee, a division of the Department of Justice, oversees every Chapter 11 case. One of its key jobs is appointing an official committee of unsecured creditors, ordinarily made up of the seven largest unsecured claim holders willing to serve.³

The committee has real leverage. It can investigate the debtor’s finances, scrutinize how the business has been run, and take part in drafting the plan.⁴ It can also hire its own attorneys, accountants, and financial advisors at the debtor’s expense, which helps keep smaller creditors from being pushed aside by larger, better-resourced ones.

Quarterly Fees

A Chapter 11 case is not free to maintain. The debtor pays quarterly fees to the U.S. Trustee based on total disbursements each quarter. For quarters beginning April 1, 2026, the fees range from $250 for disbursements under $62,625 up to $250,000 for the largest cases, with percentage-based fees in between.⁵ Payment is due within one month after each calendar quarter ends and must be made electronically.

The Automatic Stay

The moment a bankruptcy petition is filed, the automatic stay takes effect. It halts virtually all collection activity: pending lawsuits freeze, lien enforcement stops, and creditors cannot seize bank accounts or repossess equipment. That pause is what makes reorganization possible in the first place. A creditor who willfully violates the stay can be ordered to pay actual damages, attorney fees, costs, and in some cases punitive damages.⁶

The stay is not absolute. A secured creditor can move to lift it, typically arguing either that its collateral is not being adequately protected (equipment losing value with no insurance, for example) or that the debtor has no equity in the property and the property is not necessary for the reorganization.⁶ The court holds a hearing and may allow that creditor to proceed while the rest of the case moves on.

One important boundary: the stay does not block government agencies exercising regulatory authority. Environmental enforcement, health and safety proceedings, and similar actions can continue. Courts apply this exception narrowly, generally asking whether the government’s action serves a genuine public safety purpose or is really an effort to collect money.

Financing the Company Through the Case

A company in Chapter 11 usually needs cash to keep the lights on. The Bankruptcy Code allows new borrowing on a tiered basis. Ordinary-course borrowing needs no special approval. Beyond that, the court can authorize new credit with escalating protections for the lender: administrative expense priority, then a lien on unencumbered assets, then a junior lien on already-encumbered assets.⁷

The most aggressive option is a priming lien, which puts a new lender ahead of an existing secured creditor. Courts allow this only when the debtor cannot obtain financing any other way, and the existing lienholder must receive adequate protection.⁷ Existing lenders fight these motions hard, and priming lien disputes are among the most heavily litigated issues in large cases.

Keeping the Good Contracts, Dropping the Bad Ones

One of the most useful tools in Chapter 11 is the ability to sort through the company’s contracts and leases and decide which to keep. With court approval, the debtor can assume contracts it wants to continue performing or reject those that are burdensome.⁸ A rejected contract is treated as a breach that happened just before the filing, giving the counterparty a pre-petition claim for damages.

Assumption comes with strings if the contract is already in default. The debtor has to cure the default (or provide adequate assurance of a prompt cure), compensate the other side for losses from the default, and show it can perform going forward.⁸

Commercial landlords take a particular hit when a lease is rejected, so the Code caps their damages. A landlord’s claim is limited to the greater of one year’s gross rent or 15% of the remaining lease term, not exceeding three years.

Clawing Back Payments Made Before the Filing

Payments a company made in the run-up to filing can come back to haunt the people who received them. Under preference law, the trustee or debtor in possession can claw back a payment if it went to a creditor on account of a pre-existing debt, was made while the debtor was insolvent, occurred within 90 days before the filing, and gave the creditor more than it would have received in a liquidation. For payments to insiders, the lookback stretches to a full year.⁹

The rule exists to stop a struggling company from picking favorites as it goes under. It catches innocent-looking transactions. A vendor paid in the normal way for goods delivered can end up defending a preference lawsuit months later. Defenses exist, including payments made in the ordinary course of business and payments for new value, but the creditor carries the burden of proving them.

Building and Confirming the Plan

Before creditors vote on a reorganization plan, they must receive a disclosure statement approved by the court as containing “adequate information”: enough detail about assets, liabilities, operations, and projections to make an informed decision, plus the potential federal tax consequences of the plan.¹⁰ What counts as adequate scales with the case: a small-business plan needs less than a multibillion-dollar corporate one.

Voting

Creditors vote by class. A class of claims accepts the plan if creditors holding at least two-thirds of the total dollar amount and more than half of the total number of claims in that class vote yes. A class of equity interests needs two-thirds in amount.¹¹ Classes that are not impaired by the plan, meaning their legal rights remain unchanged, are deemed to have accepted and do not vote at all.

What the Court Checks

Enough votes is not enough on its own. The “best interests” test requires that every dissenting creditor receive at least as much under the plan as it would in a hypothetical Chapter 7 liquidation.¹² The court also tests feasibility: whether the debtor can realistically make the payments the plan promises. Optimistic projections that fall apart on inspection sink the plan.

Cramdown

When a class rejects the plan, the debtor is not automatically done. The court can confirm over the objection through a cramdown, provided the plan does not discriminate unfairly against the rejecting class and is “fair and equitable” toward it.¹³

For unsecured creditors, “fair and equitable” means the plan follows the absolute priority rule: no junior class, including equity holders, can receive anything unless every senior class is paid in full. For secured creditors, the plan must let them keep their liens and receive deferred cash payments worth at least the value of their collateral, or provide the “indubitable equivalent” of their claims.¹³ Once confirmed, the plan replaces the prior debt agreements and becomes the governing document.

Who Gets Paid First

Creditors do not share equally. The Code sets a strict payment order. At the top are domestic support obligations such as child support and alimony. Next come administrative expenses, which include the cost of running the case itself and the professional fees for lawyers and financial advisors. Employee wage claims follow, up to a statutory cap per employee for wages earned within 180 days before filing, and then certain tax obligations owed to government units.¹⁴

General unsecured creditors, including trade vendors, bondholders, and contract counterparties, sit below all of those priority categories. Equity holders sit at the bottom. In a deeply insolvent company, shareholders rarely recover anything. Where a claim falls on this ladder drives almost every strategic decision a creditor makes in the case.

A Streamlined Path for Small Businesses

Traditional Chapter 11 is expensive and slow, which put it out of reach for most small businesses. The Small Business Reorganization Act of 2019 created Subchapter V to address that, offering a faster and cheaper process.

Eligibility turns on debt levels. The original statute set the limit at $2,725,625, which Congress temporarily raised to $7.5 million during the pandemic era. That temporary increase expired on June 21, 2024, and as of 2026 the debt ceiling has reverted to the inflation-adjusted original amount of $3,024,725.¹⁵ Legislation to permanently restore the $7.5 million cap has been introduced but not enacted.

Several features distinguish Subchapter V from standard Chapter 11. There is no mandatory creditors’ committee, which cuts out a major expense layer. A standing trustee is appointed, but the role is to facilitate agreement between the debtor and creditors rather than to take over operations.¹⁶

The most consequential difference is that Subchapter V sidesteps the absolute priority rule. A business owner can keep equity in the company without paying every creditor in full, as long as the plan commits the debtor’s projected disposable income to plan payments for three to five years.¹⁶ Under a standard Chapter 11, absolute priority would wipe out equity before unsecured creditors took any reduction. Subchapter V’s looser rule is what actually makes the process usable for owners trying to save their companies.

Discharge timing depends on how the plan gets through. If creditors accept the plan, the debtor is discharged at confirmation. If the court confirms a nonconsensual plan, the debtor has to complete all plan payments before receiving a discharge, which can take the full three-to-five-year plan term.

Tax on Forgiven Debt

Forgiven debt normally counts as taxable income, which can generate a large tax bill on top of the distress that led to the restructuring. The Internal Revenue Code softens this in important ways. Debt discharged in a Title 11 bankruptcy case is excluded from gross income entirely.¹⁷

Outside bankruptcy, a debtor who is insolvent at the time of discharge can exclude the forgiven amount up to the extent of the insolvency, meaning total liabilities exceed total assets. Additional exclusions exist for qualifying farm debt and qualifying real property business debt.¹⁸

The exclusion has a price. In exchange for not paying tax on the forgiven amount, the debtor must reduce certain tax attributes, including net operating losses, credit carryforwards, capital loss carryovers, and asset basis, dollar for dollar. The bankruptcy exclusion takes priority over the insolvency exclusion, which in turn takes priority over the farm and real property exclusions.¹⁷ Debtors claim the exclusion on IRS Form 982, and this is an area where working with a tax professional matters. Getting the tax side wrong can turn a successful restructuring into a different kind of financial crisis.

1
Office of the Law Revision Counsel. 11 USC 1107 – Rights, Powers, and Duties of Debtor in Possession
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Office of the Law Revision Counsel. 11 USC 1121 – Who May File a Plan
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Office of the Law Revision Counsel. 11 USC 1102 – Creditors and Equity Security Holders Committees
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Office of the Law Revision Counsel. 11 USC 1103 – Powers and Duties of Committees
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U.S. Trustee Program. Chapter 11 Quarterly Fees
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Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
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Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
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Office of the Law Revision Counsel. 11 U.S. Code 365 – Executory Contracts and Unexpired Leases
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Office of the Law Revision Counsel. 11 USC 547 – Preferences
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Office of the Law Revision Counsel. 11 USC 1125 – Postpetition Disclosure and Solicitation
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Office of the Law Revision Counsel. 11 U.S. Code 1126 – Acceptance of Plan
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Office of the Law Revision Counsel. 11 U.S. Code 1129 – Confirmation of Plan
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Office of the Law Revision Counsel. 11 USC 1129 – Confirmation of Plan
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Office of the Law Revision Counsel. 11 USC 507 – Priorities
15
U.S. Department of Justice. Subchapter V Small Business Reorganizations
16
Office of the Law Revision Counsel. 11 USC 1191 – Confirmation of Plan
17
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
18
Internal Revenue Service. What if I Am Insolvent?