Key Steps in Restructuring Debt Through Chapter 11 Bankruptcy
April 28, 2025
For businesses and individuals facing overwhelming debt, Chapter 11 bankruptcy can provide a path forward.
Unlike Chapter 7, which involves liquidating assets, Chapter 11 focuses on restructuring debt so that the filer can continue operations while repaying creditors over time. This option is often used by businesses, but individuals with significant debt may also qualify.
Successfully restructuring debt through Chapter 11 requires careful planning, negotiations with creditors, and court approval of a reorganization plan. The Law Offices of David K. Blazek, P.C. in Tampa, Florida, can help you understand the key steps involved and can help those considering this option approach the process with greater confidence.
Filing the Chapter 11 Petition
The first step in restructuring debt through Chapter 11 is filing a bankruptcy petition. This can be done voluntarily by the debtor or involuntarily if creditors initiate the process. Once the petition is filed, an automatic stay goes into effect, temporarily preventing creditors from pursuing collections, foreclosures, or lawsuits. Key documents required for the petition include:
Managing daily operations: The business must continue functioning while addressing financial challenges. This includes handling payroll, managing inventory, fulfilling contracts, maintaining customer relationships, and keeping the company operational. The debtor must balance running the business with restructuring efforts.
Maintaining accurate financial records: The court and creditors require ongoing financial reporting to assess whether the business is making progress toward financial recovery. This includes preparing detailed income statements, balance sheets, and cash flow reports, as well as tracking expenses and liabilities.
Seeking court approval for significant transactions: While the debtor in possession has control over daily operations, major financial decisions require court approval. This includes large expenditures, asset sales, leasing or refinancing property, taking on new debt, and entering or exiting key contracts.
Meeting fiduciary duties to creditors: As a DIP, the debtor has a legal obligation to act in good faith and avoid actions that could harm creditors. This means making responsible financial decisions, preventing fraudulent transfers, and avoiding conflicts of interest.
Filing the petition and submitting these documents formally begins the Chapter 11 bankruptcy process. At this point, the business enters the "debtor-in-possession" phase, where it retains control over its operations, finances, and assets. The court will oversee the process, and creditors will have the opportunity to participate and raise objections.
Operating as a Debtor in Possession
After filing for Chapter 11 bankruptcy, the debtor typically remains in control of business operations as a "debtor in possession,” according to the Administrative Office of the U.S. Courts. This means that rather than handing over control to a trustee, the debtor continues running the business. Responsibilities of a debtor in possession include:
Managing daily operations: The business must continue running while addressing financial difficulties. This means handling payroll, keeping up with inventory, servicing customers, and maintaining contracts. Business owners may need to make operational adjustments to stabilize the company's financial health.
Maintaining accurate financial records: Transparent financial reporting is a cornerstone of the Chapter 11 process. The court and creditors require regular updates on revenue, expenses, debt obligations, and cash flow. The debtor must prepare income statements, balance sheets, and cash flow projections to demonstrate financial recovery.
Seeking court approval for significant transactions: While the debtor retains control over daily business activities, major financial decisions require court approval. These include asset sales, large expenditures, new financing agreements, and contract modifications that could significantly impact the business’s financial future.
Meeting fiduciary duties to creditors: The debtor must act in good faith and make decisions that align with creditors' interests. This means avoiding preferential treatment of certain creditors, preventing fraudulent transfers, and managing assets responsibly.
During this period, creditors and the court will closely monitor financial activities to determine whether reorganization is feasible. If the debtor fails to meet obligations, the court may appoint a trustee to take over operations.
Developing the Reorganization Plan
A critical step in Chapter 11 bankruptcy is drafting a plan that outlines how debts will be repaid. This plan must be realistic, financially sound, and fair to creditors. The debtor has an exclusive period — usually 120 days — to propose a plan, though creditors may submit their own plans if this period expires without a proposal. Key components of a reorganization plan include:
Debt restructuring terms: This may involve reducing debt amounts, extending repayment terms, or modifying interest rates.
Operational changes: The plan may propose changes in management, business structure, or cost-cutting measures to improve financial stability.
Creditor repayment structure: Creditors are typically divided into classes based on priority, with secured creditors often paid before unsecured ones.
Feasibility analysis: The debtor must demonstrate that the plan is financially viable and will allow for continued operations while repaying creditors.
Once the plan is developed, it must be presented to creditors for review and approval. This stage often involves negotiations, as creditors may push for better repayment terms.
Gaining Approval from Creditors and the Court
After drafting the reorganization plan, the debtor must seek approval from creditors before submitting it for court confirmation. Creditors are grouped into different classes, and each class votes on whether to accept the plan. Factors that influence creditor approval include:
The fairness of repayment terms: Creditors are more likely to support a plan that offers reasonable repayment compared to liquidation.
The likelihood of successful reorganization: If the plan appears achievable, creditors may prefer it over alternatives like foreclosure or asset seizure.
Negotiated settlements: Some creditors may negotiate better terms before agreeing to the plan.
If enough creditors approve, the plan moves to the court for confirmation. However, if certain creditors object, the court may still confirm the plan under a process known as "cramdown," provided it meets legal requirements and treats creditors fairly.
Implementing the Reorganization Plan
Once the court confirms the reorganization plan, the debtor must begin implementing the agreed-upon terms. This phase is crucial because failing to follow the plan could result in dismissal or conversion to Chapter 7 liquidation. Key steps in implementation include:
Making scheduled debt payments: The reorganization plan outlines a repayment schedule that the debtor must follow. Sticking to this schedule is essential, as missed or late payments could lead creditors to challenge the debtor’s ability to comply with the plan.
Monitoring financial performance: Regular financial reporting is necessary to track whether the business or individual is meeting its financial obligations. The debtor must submit periodic reports to the court and creditors, demonstrating compliance with the plan.
Adhering to any operational changes: Many Chapter 11 plans involve restructuring business operations to improve financial stability. This could mean streamlining expenses, changing suppliers, renegotiating leases, adjusting pricing strategies, or implementing cost-cutting measures.
Working with creditors: Maintaining open communication with creditors throughout the repayment period can help resolve any issues that arise. Some creditors may require updates on financial progress or may be willing to negotiate further adjustments if unexpected financial hardships occur.
Successfully implementing a Chapter 11 bankruptcy plan takes discipline, financial oversight, and adaptability. If the debtor adheres to the plan and completes all required payments, the remaining eligible debts may be discharged, allowing for a fresh financial start. This discharge can provide the debtor with a renewed opportunity to move forward without the burden of debt.
Reach Out Today
Chapter 11 bankruptcy offers businesses and individuals the chance to restructure their debt and regain financial control. The Law Offices of David K. Blazek, P.C. can help you understand these key steps. He serves clients in Miami, Jacksonville, Orlando, and Tampa, Florida, as well as Atlanta, Macon, and Columbus, Georgia. Call today for a consultation.