This post is part of a series of posts entitled First Considerations for the Financially Distressed Business. For a comprehensive list of articles contained in this series, click here.

The goal of chapter 11 bankruptcy is for a business to become profitable again, maximizing the return to the business’s creditors and owners. Achievement of this ultimate goal requires proposal of a plan of reorganization. A plan of reorganization can be thought of as a financial plan that the debtor, creditors, and bankruptcy court agree will help the debtor regain profitability and continue operating for the foreseeable future. The mechanics of structuring a successful chapter 11 plan vary widely depending on the needs of the debtor; however, most provide for the downsizing of a debtor’s operations. The hope is that this will reduce the debtor’s expenses, increase efficiency, and increase profits by reducing overhead costs. A chapter 11 plan of reorganization sets forth how a debtor will repay its debt obligations going forward. A plan may include modifying interest, amending payment schedules, extending due dates, or other terms. A debtor can even use a plan of reorganization to eliminate debt entirely. Once all necessary creditors have approved a debtor’s plan, the plan functions as a new contract between the debtor and its creditors. In certain contexts, however, a debtor may not view reorganizing favorably and may instead choose to file a “liquidating plan.” A liquidating plan shuts down a debtor’s business and provides for the orderly sale of its remaining property. While this outcome can also be accomplished through a chapter 7 business bankruptcy, a chapter 11 plan of liquidation may be viewed as more suitable for a debtor in certain circumstances.