A case filed under Chapter 11 of the Bankruptcy Code is frequently referred to as a reorganization proceeding. Put in its simplest terms, a business that files for Chapter 11 protection is attempting to continue its business without the full burden of debt that existed prior to the proceeding.

In a Chapter 11 proceeding, management usually continues to operate the business and prepares a plan of reorganization (the “plan”) for Court approval. In addition, prepetition liabilities are usually stayed and not permitted to be paid unless approved by the Court. Claims are usually paid in order of priority, with the secured claims having the highest priority, followed by administrative claims, then unsecured creditors. Last in line are equity holders, who are usually compromised.

Nearly every type of business enterprise, as well as individuals, can file for protection under Chapter 11 if they meet the criteria set forth by the Bankruptcy Code. Not all enterprises that enter a Chapter 11 bankruptcy will later exit as newly reorganized entities. As discussed later in this chapter, as a case progresses, it is not unusual for a planned reorganization to evolve into a Court-approved sale of some or all of the debtor's assets or a liquidation of its assets.