| Phase | What Happens | Investor Opportunity |
|---|---|---|
| Filing | Automatic stay halts all collections | Panic selling creates discounts |
| First Day Motions | Critical vendor payments, DIP financing | DIP lending (super-priority) |
| Exclusivity Period | Debtor proposes reorganization plan (120 days) | Analyze plan, identify fulcrum security |
| Disclosure Statement | Court approves information for creditor voting | Due diligence on proposed plan |
| Plan Confirmation | Creditors vote, court confirms | Trade claims based on plan recovery |
| Emergence | Company exits Chapter 11 with new capital structure | New equity or debt at reorganization value |
The automatic stay is the most powerful feature of Chapter 11 — it immediately halts all lawsuits, collections, and foreclosures. This breathing room allows the company to restructure without being dismembered by creditors.
Going Deeper — the absolute priority rule (APR) is violated more often than the textbook implies. Junior creditors and equity frequently receive small "tip" payments — warrants, modest equity stakes, or cash bumps — even when the senior class is impaired. Why: contested confirmations slow the case, burn estate value, and expose the senior class to litigation risk. A modest APR violation is often cheaper than fighting. The reading discipline is to model your recovery against both strict APR and a 5-15% tip to the next class down. If your fulcrum-security thesis depends on strict APR enforcement, it is more fragile than it looks. AI prompt: "For this Chapter 11 case, walk me through the proposed plan of reorganization. Identify the fulcrum security under strict APR. Then estimate recoveries assuming a 10% tip to the impaired junior class. How much does my fulcrum-security thesis change?"
Sit with the ideas.
A manufacturer files Chapter 11 with: $500M senior secured term loan, $300M senior unsecured bonds, $200M subordinated notes, and $100M equity. The financial advisor estimates reorganization enterprise value at $650M. What is each class's expected recovery?