Chapter Eleven bankruptcy is often referred to as a reorganization, because it involves restructuring contractual and debt arrangements.

This is different than the liquidation provided by a Chapter Seven or “straight liquidation” bankruptcy.

What makes Chapter 11 confusing is that Chapter 11 bankruptcies can also involve debt liquidation or the canceling of debts.

While individuals can file Chapter 11 bankruptcy, Chapter 11 is most frequently filed by financially distressed businesses.

The aim of Chapter 11 bankruptcy is to provide the failing business with a financial “fresh start,” by allowing the business to restructure its debts and contracts so that the business can survive. The rationale is that a successful business that emerges from Chapter 11 bankruptcy can pay more to its creditors than simply selling off used business assets.

The Chapter 11 bankruptcy case can remain open for several months or several years, but it closes when the Bankruptcy Court approves a plan of reorganization.

During the bankruptcy process, a “debtor in possession” is assigned and charged with investigating the business financial circumstances, operating the business, and reporting to the Bankruptcy Court.

Bankruptcy attorneys often advise that the reorganization plan can be proposed by the bankrupt company or by the company’s creditors. The Bankruptcy Code sets out specific requirements for determining what reorganization plans the bankruptcy courts will approve.