Chapter 11 is the clause of the Federal Bankruptcy Code that protects a company from its creditors, while giving it a chance to reorganize in hopes of a return to profitability. In Chapter 11, the day-to-day business is still run by the company’s executive team, but the bankruptcy court must approve all major strategic decisions. In contrast, a Chapter 7 filing means that the company will simply liquidate its remaining assets and go out of business. (Chapter 13 covers individuals filing for protection from creditors. Earlier this year, Congress was considering reforms to existing bankruptcy law as it applies to individuals, but no action has occurred as of yet.)
In 1800, the United States passed its first bankruptcy law after rampant land speculation. It was repealed three years later. Over the next hundred years there were on-again, off-again bankruptcy laws as temporary responses to economic conditions. The Bankruptcy Act of 1898 was the first permanent set of laws to protect struggling companies from their creditors. Still, bankruptcy was rarely used until the Bankruptcy Reform Act of 1978 created Chapter 11. A number of high-profile filings followed, and the rest is history.
