Chapter 11 is entitled as reorganization in the bankruptcy
laws of the United States.

Definition

A business in distress can file two types of bankruptcies. One is chapter
7 in which the entire assets of the business are liquidated and the business
is also ceased. The other is chapter 11 in which the business continues to function
while the bankruptcy court supervises the reorganization of company's debts.
In chapter 11 bankruptcy the court can allow a partial relief from most of the
company's debts. Many times this has happened that when companies file for chapter
11 and there debts exceed their total assets, then at the end of the case the
court terminate all rights of the owners and the reorganized company is given
to the creditors as compensation of their losses.

Chapter 11 Rationale

The value of the company is far greater then the sum of its parts that were sold off individually. For this reason the company is given a partial debt relief so that it can continue its operation and the reorganized company is given to the creditors. This is economically sound technique as the employees of that company don't lose their jobs, the assets remain with the company, and the business after reorganization starts earning profit again. The creditors would have got very less amount of money if the assets were liquidated then they would get in reorganization.

Chapter 11 How it works

In Chapter 11 the creditors registering with the court can be heard so that the reorganization
of business serves its purpose and the creditors are treated equally. Priority
claims are determined by Section 507 of the Bankruptcy Code. The general rule,
however, implies that the secured creditors have a higher priority then the
unsecured creditors. When chapter 11 is filed in court, the creditors of that
business are stopped from all collection activities except through the bankruptcy
court. In some situations, the creditor or United States Trustee can ask the
bankruptcy court to change the case form chapter 11 to chapter
7 or to appoint an administrator for the reorganization. The court will
decide what action to take keeping in view the best interests of all creditors in Chapter 11.

The reorganization plan

In Chapter 11 once the petition is filed the debtors are asked to submit a reorganization
plan. Failing to do so, the court may welcome the proposals of the creditors.
In case no plan is accepted by the court, the court can either change the case
to chapter 7 or if in the best interests of creditors, dismisses the case and
the company is returned to its original status before bankruptcy.

Companies Stock exchange status

When a company filing chapter 11 has its stock publicly traded, then it is de-listed from its primary stock exchange if it was listed on NASDAQ or New York Stock Exchange or American Stock Exchange. The NASDAQ also places a symbol Q at the end of the stock symbol indicating bankruptcy.

Types of debts cancelled

The unsecured loans are generally cancelled in the chapter 11 bankruptcy. If the company's financial situation can be improved then its union contracts, supply or operating contracts and long-term real estate leases are also cancelled.