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Chapter 11 bankruptcy

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Chapter 11 bankruptcy, typically used by corporations or partnerships, reorganizes in order to continue operating the business and to pay its creditors over time.

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Rehabilitation, or reorganization, of debt is an option that courts usually favor because it provides creditors with a better opportunity to recoup what is owed to them. Rehabilitative bankruptcies are governed most often by chapter 11 or chapter 13 of the Bankruptcy Code.[1] Chapter 11 bankruptcy typically applies to individuals with excessive or complex debts, or to large commercial entities such as corporations. According to the Phoenix Bankruptcy Law News, this type of bankruptcy allows the debtor to retain nonexempt assets without going through liquidation. This is as long as the debtor is able to follow the terms of a reorganization plan that is approved by the U.S. Bankruptcy Court.[2]

Unlike liquidation, as done with a chapter 7 bankruptcy, rehabilitation provides the debtor with an opportunity to retain nonexempt assets. In return, the debtor must agree to pay debts in strict accordance with a reorganization plan approved by the bankruptcy court. During this repayment period, creditors are unable to pursue debts beyond the provisions of the reorganization plan. This gives the debtor the chance to restructure affairs in the effort to meet financial obligations.

To be eligible for rehabilitative bankruptcy, the debtor must have sufficient income to make a reorganization plan feasible. If the debtor fails to comply with the reorganization plan, the bankruptcy court may order liquidation. A debtor who successfully completes the reorganization plan is entitled to a discharge of remaining debts. In keeping with the general preference for bankruptcy rehabilitation rather than liquidation, the goal of this policy is to reward the conscientious debtor who works to help creditors by resolving his or her debts.


  1. http://codes.lp.findlaw.com/uscode/11/11
  2. http://phoenixbankruptcynews.com/2011/05/sbarro-reconsiders-chapter-11-bankruptcy-options.html

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