A Chapter 11 case begins with the filing of a petition for bankruptcy, either voluntarily by the debtor or involuntarily by its creditors, in any bankruptcy court. Each state, plus the District of Columbia, has a bankruptcy court. The filing usually takes place in the region where the debtor is domiciled. Regardless of the party filing the Chapter 11 petition, the objective in most Chapter 11 filings is to preserve the viability of the operating entity and maximize value to the interested parties. The filing usually includes:

Once the petition has been filed, most judgments, creditor collection activities, and repossessions of property for obligations that arose prior to the filing of the bankruptcy petition are stayed. This process, which provides the debtor relief from collection efforts while it reorganizes its business affairs, is known as an automatic stay.

Upon filing for bankruptcy under Chapter 11, the debtor (or trustee, as applicable) has the power to recover transfers of money or property made during the period of time immediately prior to the bankruptcy filing date. This is commonly referred to as "avoiding" powers, and allows for a return or disgorgement of payments or property to the debtor, which can then be used to pay all creditors. Generally, the "avoiding" powers are effective for transfers made by the debtor within 90 days of the bankruptcy filing date, with some exceptions. For example, certain state laws allow for a longer period of time, and transfers to insiders, such as relatives, general partners, and directors or officers of the debtor, may be avoided for up to a year prior to the date the bankruptcy petition is filed. Conveyances within two years of the filing of the petition deemed fraudulent can be voided.

In order to recover the payment or property from an avoided transfer, the debtor may initiate a lawsuit referred to as an adversary proceeding. An adversary proceeding may also be initiated by the creditors, for example, when the debtor has refused a demand by its creditors to avoid transfers to its insiders.

The Bankruptcy Code defines a claim as a right to payment or equitable remedy for failure to perform if the breach gives rise to the right to payment. The debtor's initial filings will usually include a schedule of the debtor's known creditors prepared by the debtor from its records. If the debtor lists the claim, a creditor does not have to provide support for its claim as the debtor's schedule is deemed to constitute evidence of the validity and amount of the claim. Any creditor whose prepetition claim is not listed, listed in an amount that differs from the creditor, or listed as disputed, contingent, or unliquidated, must file evidence of its claim. Claims generally become "allowed" claims if they are not disputed by the debtor during the proceedings. The Court ultimately determines whether a disputed claim is allowed.

Soon after the filing of the petition, hearings are held before the Court where certain matters related to the bankruptcy and the debtor are brought forward for approval. For example, as the debtor is expected to operate its business during the bankruptcy process, the approval of debtor-in-possession financing or payments to critical vendors for some or all of their prepetition liabilities may be necessary. These arrangements are deemed critical and absolutely necessary for the continued operations of the debtor. In return, certain protections are provided to the vendors for continuing to provide inventory, services, or funding for the debtor-in-possession's operations while it is in reorganization. Other items that might be addressed during these early hearings are the approval of employee-related costs and the payment of taxes and other fees. Further, when a company files for bankruptcy, creditors typically seek an injunction preventing the equity holders from engaging in sales of stock or other actions that would limit the use of losses or tax attribute carryforwards. This is often done to preserve favorable bankruptcy tax planning options that may be available when the reorganization occurs.

Subsequent to filing, the debtor must prepare and file monthly operating reports with the Court. The monthly operating report is designed to give interested parties information about the debtor's business operations in order to assist the parties with monitoring the likelihood of a successful reorganization. The Schedule of Receipts and Disbursements is the primary schedule in most reports and provides a detailed reconciliation of funds flow for the period, as well as cumulative petition-to-date amounts. From an accounting perspective, the schedule is similar to a statement of cash flows prepared using the direct method. The reports are usually due on the 20th day after month end. Oftentimes, advisors assist management with preparing the reports.

As the debtor continues to operate after the filing, it will begin preparing its reorganization plan. The reorganization plan represents the path forward for the debtor and the operational and financial changes that are necessary in order to operate as a going concern. In most instances, the plan is prepared by the management of the debtor, usually with a high degree of input from the creditors and their committees. The intent and objective of the plan is to demonstrate to the prepetition claim holders the reasons why they could expect more from executing the plan than from a liquidation of the debtor. The plan sets forth the structure and nature of operations of the emerging entity that would achieve this goal.

The debtor has the exclusive right for 120 days after the bankruptcy petition is granted to file a plan of reorganization and another 60 days (a total of 180 days) to obtain acceptance by the creditors and equity holders before other interested parties can file an alternative plan. The Court may extend or reduce both time periods on request of any party after notice and hearing, and in many cases, the debtor requests an extension to file its plan of reorganization. When extended, the exclusivity period to file a plan of reorganization cannot exceed 18 months from the filing of the petition; and the period to seek the plan's acceptance cannot exceed 20 months. Once the exclusivity period has expired, any creditor, trustee, or other party in interest may file a competing plan, which provides the debtor incentive to file a plan within the exclusivity period.

The debtor must decide during the proceedings whether to assume or reject existing contracts. These contracts, which can include leases, labor contracts, or other executory agreements, are terminated upon rejection by the debtor and approval by the Court. Any damages to the counterparty from the termination become unsecured claims. These damages are often calculated by formulas used by the Court for leases and other common contracts. In other cases, damages are determined through negotiations and hearings before the Court. If the debtor decides to assume (not reject) a contract, the contract terms will continue, and the debtor must become current on all past due payments and remain current throughout the proceedings. Finally, given the debtor's ability to reject contracts in their entirety as part of the bankruptcy process, the debtor may be able to renegotiate its contracts at more favorable terms.

Impairment, as used in the context of a bankruptcy, is a legal term that defines the status of a creditor's contractual rights in the plan of reorganization. This is not the same use of the word as defined in US GAAP, which usually means an asset's fair value is less than its carrying amount. For example, as a debtor prepares its reorganization plan, it might determine that it can fully pay all of its creditors in the secured, administrative, and priority unsecured creditor classes. These classes, and the liabilities included therein, would be expected to be reflected as "unimpaired claims" in the reorganization plan. However, assume the last class to be paid, representing the general unsecured creditors, is expected to be paid between 50 percent and 80 percent of their claim amounts. These claims would be reflected as "impaired claims" in the reorganization plan. The plan's reflection of the different classes of claims provides visibility to the creditors and other parties in interest as to how their claims might be resolved if the plan is confirmed.

After filing the plan with the Court, the proponents of the plan will seek its acceptance by a vote of the creditors. The information given to those entitled to vote on the plan is contained in a document referred to as the disclosure statement. The disclosure statement is usually prepared by the debtor and cannot be distributed until the Court approves it as well as the adequacy of the reorganization plan. The Bankruptcy Code does not contain specific disclosure requirements for the disclosure statement, but the document is generally expected to include sufficient information to enable creditors to make an informed judgment about the fairness and appropriateness of the plan.

The disclosure statement usually includes the following:

Once the disclosure statement is approved by the Court, the reorganization plan (or a Court approved summary), the disclosure statement, the time frame and ballot necessary to vote on the plan, the date to confirm the plan, and any other relevant material is provided to creditors and equity security holders. Claim holders are usually classified as secured creditors, unsecured creditors with priority, general unsecured creditors or equity holders. Following a solicitation period, each class of claim holders may vote on the reorganization plan. Each impaired class will vote independently, as a class, to accept or reject the plan. Acceptance of the plan by a class of claim holders has occurred if both of the following approvals have been met:

Since equity holders generally receive little, if any, value in the reorganization plan, they are often deemed to reject the plan and their vote is not necessary. Similarly, impaired creditors who will not receive any consideration under the plan are deemed to reject it. In contrast, unimpaired classes are deemed to accept the reorganization plan.

Subsequent to balloting stakeholders, the Court will hold a hearing to determine whether to confirm the plan. Even if all classes of creditors do not approve the plan, under certain conditions, the Bankruptcy Code allows the Court the latitude to confirm a plan of reorganization under what is referred to as "cram down" provisions. This action binds all creditors and equity holders to the terms of the plan, even if their respective classes did not approve the plan, were impaired under the plan, or were not addressed by the plan. Under the "cram down" provisions, the Court may confirm a reorganization plan as long as one class of non-insider, impaired claimholders has voted to accept the plan, and the Court finds the plan is fair and equitable and does not discriminate unfairly to each nonconsenting class impaired by the plan.

If the creditors vote in favor of the plan, the debtor can request confirmation of the plan by the Court. The Court will confirm the plan if it determines that the plan is feasible, proposed in good faith, and complies with the Bankruptcy Code. In order to satisfy the feasibility requirement, the Court must find that confirmation is not likely to be followed by liquidation or the need for additional financing to carry out the reorganization plan.

The confirmation date is the date the Court approves the plan of reorganization. Confirmation of the plan by the Court allows the debtor to emerge from the reorganization process, binds the debtor to the provisions of the plan, vests property of the bankrupt estate with the debtor, and discharges the debtor from prepetition liabilities as set forth in the plan. The plan also creates new contractual rights that replace or supersede prepetition contracts.

The Court will set an effective date for emergence, which can be a specified date or a date when all material conditions precedent to the plan becoming effective are met. At that time, the debtor has emerged from bankruptcy. The effective date is also referred to as the emergence date.