Toolkit · Bankruptcy

The Bankruptcy and Restructuring Toolkit

11 U.S.C. § 109

Type: Toolkit
Jurisdiction: National
Date: 2026-05-19
Topic: Bankruptcy

This toolkit is the front door to bankruptcy and restructuring on UpLaw. It maps the whole distress landscape — the out-of-court alternatives (workouts, assignments for the benefit of creditors, Article 9 foreclosures, and receiverships), the chapter menu under Title 11, the automatic stay and property of the estate, the debtor's and the creditors' respective playbooks, avoidance actions for preferences and fraudulent transfers, executory contracts and IP licenses, Section 363 sales and distressed M&A, and plan confirmation, cramdown, and discharge. Each pillar gives plain-English doctrine, the anchor authority in Title 11 and the Supreme Court, the traps that catch people, and links into UpLaw's deeper guides and checklists. Bankruptcy is federal law, but it borrows state law constantly — for property interests, exemptions, liens, and fraudulent transfers — and this toolkit flags every place that seam opens. A running example follows a fictional distressed manufacturer, Kestrel Fabrication, Inc., through every option. Use it as a research map: skim the landscape, jump to the pillar you need, then follow the links down.

The Bankruptcy and Restructuring Toolkit

Bankruptcy > Bankruptcy and Restructuring | Published 19 May 2026 - Updated 16 June 2026 | UpLaw - uplaw.us

Bankruptcy is not one event. It is a menu — of forums, of chapters, of leverage — and the choices a distressed company makes in the ninety days before a filing usually matter more than anything that happens after. This toolkit is the map of that menu.

Keywords: bankruptcy, restructuring, chapter 11, chapter 7, subchapter V, automatic stay, property of the estate, proof of claim, preferences, fraudulent transfer, Section 365, 363 sale, distressed M&A, cramdown, absolute priority, discharge, workout, receivership

How to read this toolkit

Most people meet bankruptcy law as a crisis: a customer stops paying, a lender declares a default, a payroll cycle looms with nothing to fund it. In that moment, the instinct is to ask "should we file?" — which is almost always the wrong first question. The right first questions are whose property is this, who has a lien on it, who gets paid in what order, and which forum gives us leverage over the people we cannot otherwise control. Bankruptcy is, at bottom, a collective proceeding that answers exactly those questions and stops the race to the courthouse. Everything else is machinery.

This toolkit walks that machinery in ten pillars. It is a research map, not a treatise. Each pillar gives you the plain-English doctrine, the anchor authority in the Bankruptcy Code (Title 11 of the U.S. Code) and the leading cases, the classic traps, and a link into UpLaw's deeper treatment. For the doctrinal foundation under everything below, keep Bankruptcy Law: A Comprehensive Guide to Chapters 7, 11, and 13 open in the next tab; for the reorganization mechanics in depth, Chapter 11 Reorganization: A Comprehensive Guide for Debtors and Creditors.

Two structural points to hold onto before you start.

Bankruptcy is federal, but it runs on state law. Title 11 is a uniform federal statute administered by federal bankruptcy courts. But it almost never creates property rights; it redistributes them. Whether the debtor owns an asset, whether a lien attached and perfected, whether a transfer was fraudulent, whether a contract was even validly formed — those are creature questions of state law. The Supreme Court said it plainly in Butner v. United States, 440 U.S. 48 (1979): property interests are created and defined by state law, and bankruptcy respects them unless a federal interest requires otherwise. Every pillar below has a seam where state law bleeds through, and this toolkit flags each one.

The pre-filing period is where cases are won and lost. Preferences reach back 90 days (one year for insiders). Fraudulent transfers reach back two years under federal law and often four or more years under state law incorporated through § 544(b). And the board's exposure changes as the company nears insolvency — though not in the way most people assume (see Pillar 5). A distressed company that spends those months paying favored creditors, moving assets to affiliates, or letting the founder's guaranteed loan get repaid first is not avoiding a bankruptcy — it is pre-loading one with litigation.

A running example keeps this concrete. Meet Kestrel Fabrication, Inc., a fictional Delaware corporation that does precision metal fabrication out of a leased plant in Ohio. Kestrel has roughly $40 million in revenue, 180 employees, and a problem: its largest customer cut orders by half, a botched equipment purchase blew a hole in the balance sheet, and it is now six weeks behind on trade payables. Its capital structure: an $18 million secured revolver and term loan from Cordwain Bank, with a blanket lien on all assets; a $2.4 million equipment lease; roughly $9 million of unsecured trade debt; a five-year plant lease with three years to run; a license to a patented coating process it cannot operate without; two months of unremitted payroll taxes; and a personal guaranty from its founder in favor of Cordwain. By the end of this toolkit, Kestrel will have run every option on the menu.

The distress landscape at a glance

The ten pillars, in the order this toolkit walks them:

Before bankruptcy — Workouts, forbearance agreements, out-of-court exchanges, Article 9 foreclosures, assignments for the benefit of creditors, and receiverships. Cheaper, quieter, and consensual — but they cannot bind a holdout.
The chapter menu — Chapter 7 (liquidation), 11 (reorganization), subchapter V of chapter 11 (small business), 13 (individual wage-earner), 12 (family farmer/fisherman), 9 (municipality), 15 (cross-border). Eligibility lives at 11 U.S.C. § 109.
The automatic stay and property of the estate — §§ 362 and 541. The two provisions that make bankruptcy bankruptcy: everything the debtor owns comes into one pot, and everyone must stop grabbing at it.
The creditor's playbook — Proofs of claim, priority under § 507, secured status under § 506, setoff, reclamation, stay relief, committee service, and objections.
The debtor's playbook — First-day motions, cash collateral and DIP financing (§§ 363(c), 364), exclusivity (§ 1121), the disclosure statement (§ 1125), and the discipline of running a business as a fiduciary.
Avoidance actions — Preferences (§ 547), fraudulent transfers (§§ 548, 544(b) plus the Uniform Voidable Transactions Act), the strong-arm power (§ 544(a)), postpetition transfers (§ 549), and the safe harbors.
Executory contracts, leases, and IP licenses — § 365: assume, assume and assign, or reject. Plus § 365(n) and Mission Product.
Distressed M&A and the § 363 sale — Buying assets free and clear, stalking-horse bids and break-up fees, credit bidding, and the successor-liability question.
Plan confirmation, cramdown, and discharge — §§ 1122, 1123, 1126, 1129, 1141; the absolute priority rule; and the outer limits of what a plan can do after Purdue Pharma.
Special problems — IP, real estate, employment claims, and taxes, each of which behaves badly in bankruptcy in its own particular way.

Pillar 1 — Before bankruptcy: workouts, ABCs, and receiverships

Bankruptcy is expensive, public, and slow. Most distress never gets there. The out-of-court toolkit has four main instruments, and the choice among them turns on one variable: can you get the holdouts to agree?

The workout and the forbearance agreement. A workout is nothing more than a renegotiated contract — extended maturities, reduced principal, converted debt, new covenants, sometimes equity to the lender. Its virtue is speed and confidentiality; its vice is unanimity. Every creditor whose rights you want to change must sign. A forbearance agreement is the workout's holding pattern: the lender agrees not to exercise remedies for a defined window, in exchange for milestones, information rights, a fee, and — this is the part clients miss — usually a release of lender liability and a stipulation to the amount and validity of the debt. Signing away the ability to challenge a lien in exchange for 60 days of quiet is a bad trade if the case ends in chapter 11 anyway. Read forbearance agreements with the same rigor as any other commercial contract; see The Commercial Contracts Toolkit: Drafting, Reviewing, and Enforcing Business Agreements.

Article 9 foreclosure. A secured lender with a perfected blanket lien does not need a court. Under UCC §§ 9-609 and 9-610 it may take possession (without breach of the peace) and dispose of the collateral in a "commercially reasonable" manner, applying proceeds to the debt. A friendly Article 9 foreclosure sale — often to a buyer the lender has lined up — can transfer a business in weeks. The catch is that the sale is only as clean as its commercial reasonableness, and unsecured creditors left behind may later attack it as a fraudulent transfer if the price was inadequate.

The assignment for the benefit of creditors (ABC). An ABC is a state-law liquidation: the company assigns all its assets to a fiduciary assignee, who sells them and distributes proceeds by priority. It is faster and cheaper than chapter 7 and it does not require the debtor to satisfy federal eligibility rules. But it is genuinely state-specific — there is no national law of ABCs, and the differences are not cosmetic. Delaware runs ABCs through the Court of Chancery under a statutory scheme (10 Del. C. § 7381 et seq.), with court supervision, an inventory, and a bond. California's is largely a common-law device with statutory machinery layered on top, including a preference-avoidance power for the assignee (Cal. Code Civ. Proc. § 1800). Other states have their own variants; a few are openly hostile to the device. Three limits are close to universal and worth stating plainly: an ABC generates no automatic stay, so a determined creditor can still sue and levy; it produces no discharge, so the corporate shell simply ends with unpaid debt; and the assignee takes subject to existing liens and cannot sell free and clear of a non-consenting secured creditor the way a § 363 sale can. Confirm your state's rule before you plan around it.

Receivership. A receiver is a court-appointed fiduciary who takes custody of property, usually at a secured creditor's request after default. State receiverships dominate in real estate; the Uniform Commercial Real Estate Receivership Act has been adopted in a growing minority of states and is worth checking. Federal equity receiverships run under Fed. R. Civ. P. 66 and 28 U.S.C. §§ 754 and 959, and are the standard tool in SEC and FTC enforcement. A receivership can be as narrow as one apartment building or as broad as an entire enterprise, and a receiver — unlike an ABC assignee — often has the power to operate the business.

Kestrel's out-of-court options. Cordwain Bank, holding a blanket lien, has all the leverage. A workout is possible only if the trade creditors and the equipment lessor will play along; a single vendor with a $600,000 claim and a judgment could garnish Kestrel's operating account and end the exercise in an afternoon. That is the definitional weakness of the out-of-court path: it cannot bind a holdout. When one creditor's self-interest can destroy the going concern, you need the automatic stay — which means you need a case. For the entity-level and governance questions that surround this decision, see Running Multiple Businesses Under One Structure: A Deep Dive into Holding, Operating, and Parent Companies and The Small Business Legal Toolkit.

Pillar 2 — The chapter menu and choosing a path

Eligibility is at 11 U.S.C. § 109. The chapter you choose determines everything downstream.

Chapter	Who	What it does
7	Individuals and entities	Liquidation. A trustee sells the assets and distributes under § 726. Individuals get a discharge (§ 727); corporations and LLCs do not (§ 727(a)(1)).
11	Anyone eligible for 7, plus railroads	Reorganization or a sale. Debtor usually stays in possession (§ 1107). Confirmation under § 1129.
11, subchapter V	"Small business debtors" under a debt ceiling	Streamlined chapter 11: no committee by default, no disclosure statement requirement, no absolute-priority bar, a trustee who facilitates rather than displaces.
12	Family farmers and fishermen	Chapter 13-style plan tuned to agricultural cash flow.
13	Individuals with regular income under debt limits	Three-to-five-year repayment plan; the debtor keeps property. §§ 1322, 1325.
15	Foreign debtors	Recognition of a foreign proceeding and ancillary relief.

Two eligibility traps. First, entities cannot get a chapter 7 discharge — a chapter 7 corporate filing is a supervised liquidation, not a fresh start, and the officers' guaranties survive it untouched. Second, the subchapter V debt ceiling has moved repeatedly: a temporary $7.5 million cap lapsed in June 2024, reverting to the lower inflation-adjusted statutory figure, and Congress has revisited the number more than once. Confirm the ceiling in effect on your filing date rather than relying on any secondary source, including this one.

Kestrel's path. Chapter 7 destroys the going concern and leaves Cordwain to foreclose. Traditional chapter 11 is available but expensive. Subchapter V is almost certainly out of reach on the debt numbers. The realistic menu narrows to: a chapter 11 with a plan of reorganization, or a chapter 11 filed to run a fast § 363 sale of the business as a going concern with the sale proceeds distributed under a liquidating plan. Which one depends on whether anyone will finance the reorganized company — which is a question about Pillar 5, not Pillar 2.

Pillar 3 — The automatic stay and property of the estate

These two sections are the engine.

Property of the estate — § 541. The instant a petition is filed, an estate springs into existence comprising "all legal or equitable interests of the debtor in property as of the commencement of the case," wherever located and by whomever held (§ 541(a)(1)). It is deliberately broad: causes of action, tax refunds, contract rights, goodwill, licenses, and (for individuals) most everything the debtor owns, subject to exemptions under § 522 — where state law is decisive, because states may opt out of the federal exemption scheme and most have. What the estate does not get: the debtor's post-petition earnings in chapter 7 (§ 541(a)(6)), property held only in trust for another, and — importantly — assets the debtor merely possesses but does not own. Consignments, bailments, and true leases stay out. Butner controls the boundary.

The automatic stay — § 362. Filing operates as an injunction against essentially all collection activity: commencing or continuing litigation, enforcing judgments, perfecting or enforcing liens, setoff, and "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case" (§ 362(a)). It is automatic — no order required — and it binds creditors whether or not they have notice, though willfulness matters to damages under § 362(k). Violations are void or voidable depending on the circuit, and courts award actual damages, fees, and sometimes punitive damages for willful violations.

The stay's exceptions are in § 362(b) and are narrower than creditors hope: criminal prosecutions, certain domestic-support proceedings, most police-and-regulatory actions by a governmental unit (but not enforcement of a money judgment), and a handful of financial-contract carve-outs. Relief from the stay is obtained under § 362(d) — "for cause, including lack of adequate protection," or, as to property, where the debtor lacks equity and the property is not necessary for an effective reorganization. An order denying stay relief is a final, immediately appealable order: Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020).

Kestrel's day one. The moment Kestrel files, the vendor's garnishment stops, Cordwain cannot sweep the lockbox without a court order, the landlord cannot evict, and the equipment lessor cannot repossess. That breathing spell is the whole point of the filing. But note what the stay does not do: it does not protect the founder's personal guaranty. Guarantors are non-debtors, and § 362 protects the debtor, not co-obligors. Cordwain can sue the founder personally on day two. (Chapter 13 has a narrow co-debtor stay at § 1301 for consumer debts; chapter 11 does not.) Extending relief to non-debtor principals requires an injunction under § 105(a) on a showing that the litigation would frustrate the reorganization — and after Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), courts are markedly more careful about anything that looks like relief for non-debtors.

Pillar 4 — The creditor's playbook

If you are the creditor, your job is a sequence, and the first three steps are all deadlines.

Stop, and read the notice. The single most expensive creditor mistake is continuing to collect after the petition — a dunning letter, a lawsuit not dismissed, a setoff taken. Do it immediately, in writing, across every collections vendor and every automated system you control. If the debtor is an individual and a third-party collection agency is involved, the overlap with the federal Fair Debt Collection Practices Act is real — a collection letter sent after the petition can violate both § 362 and 15 U.S.C. § 1692, and the state unfair-and-deceptive-practices statutes layered on top vary state by state, with no uniform national standard. See Consumer Protection Law: A Comprehensive Guide to the FDCPA, FCRA, TCPA, and State UDAP Statutes and FDCPA Debt Collection Compliance: A Practical Checklist.

File the proof of claim. A proof of claim (Official Form 410) is a written statement of the claim, executed and filed with supporting documentation, under Fed. R. Bankr. P. 3001–3003. A properly filed claim is prima facie evidence of validity and amount; the objector bears the burden of producing evidence to rebut it. Bar dates are jurisdictional in practice and unforgiving. Run the full sequence in Filing a Proof of Claim in a Bankruptcy Case: A Practical Checklist, and for the broader triage — stop shipping? demand adequate assurance? reclaim goods? — use When a Customer Files Bankruptcy: A Creditor's Checklist.

Find your priority. The waterfall is § 507, and it runs, in simplified order: secured claims paid from their collateral (§ 506) outside the waterfall entirely; then administrative expenses (§ 503(b)) including the costs of the case; then, for cases with employees, wages and benefits earned within 180 days before the filing up to a per-employee cap that is adjusted every three years (§ 507(a)(4)–(5)); then certain consumer deposits; then most tax claims (§ 507(a)(8)); and finally general unsecured claims, which share pro rata whatever is left — usually cents. Two priorities that reward attention: § 503(b)(9) gives an administrative claim for the value of goods received by the debtor within 20 days before the petition, which converts an ordinary trade claim into a near-front-of-the-line claim; and § 553 preserves the right of setoff for mutual pre-petition debts, though exercising it requires stay relief.

Object, or serve. Creditors are not passive. The U.S. Trustee appoints an official committee of unsecured creditors under § 1102, which is estate-funded, has a fiduciary duty to the class, and is the principal check on the debtor and the secured lender. And "party in interest" standing under § 1109(b) is generous: in Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268 (2024), the Supreme Court held that an insurer with financial responsibility for claims is a party in interest entitled to be heard on plan confirmation.

Pillar 5 — The debtor's playbook

A chapter 11 debtor is a debtor in possession — it keeps its assets and its business but acquires the duties of a trustee (§ 1107), which means fiduciary obligations to the estate and its creditors, not to the equity holders who hired management.

What actually happens to directors' duties near insolvency — and what does not. This is the single most misunderstood point in distressed corporate practice, and it is worth getting right, because it is a question of state corporate law, not the Bankruptcy Code. Corporate governance is state law; Delaware is the reference point in this toolkit because most operating companies of any size are incorporated there and because its case law is the most developed — but a company chartered elsewhere is governed by its state's law, and you must check it.

Under Delaware law, directors do not acquire a new, direct fiduciary duty running to creditors when the corporation enters the "zone of insolvency." The Delaware Supreme Court said so in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007): directors continue to owe their duties to the corporation and its shareholders, and creditors of an insolvent corporation acquire standing to bring derivative claims on the corporation's behalf — not direct claims for breach of fiduciary duty. The duty does not "shift"; the plaintiff pool changes. What that means in practice is more demanding, not less: the board must maximize the value of the enterprise as a whole, it becomes answerable for that effort to a constituency that now includes creditors, and it should expect its deliberations to be reconstructed later by a creditors' committee or a litigation trustee with subpoena power. Contemporaneous minutes, a documented process, and independent advice are the defense. For the framework and the duty-of-care and duty-of-loyalty standards behind it, see Corporate Governance and Fiduciary Duties: A Comprehensive Guide for Directors and Officers. Confirm D&O coverage — including whether the policy has an insured-versus-insured exclusion and how it responds once a trustee sues — before the filing, not after; coverage is a matter of state insurance law and policy wording, and it varies. See Insurance Coverage Law: A Comprehensive Guide for Policyholders and The Business Insurance and Coverage Toolkit.

First-day motions. In the opening 48 hours the debtor asks for the relief without which the business stops: authority to pay pre-petition employee wages, to honor customer programs, to keep utilities on (§ 366 lets utilities demand adequate assurance within 30 days), to maintain cash-management systems, and — the big two — to use cash collateral and to obtain DIP financing.

Cash collateral and DIP financing. If Cordwain's lien covers accounts and their proceeds, then every dollar Kestrel collects is Cordwain's cash collateral, and Kestrel cannot spend it without consent or a court order granting Cordwain adequate protection (§§ 363(c)(2), 361) — typically replacement liens, periodic payments, and a budget. New money comes in under § 364, which offers escalating inducements: administrative priority, then superpriority, then liens on unencumbered property, and finally — with notice and a hearing, and only if no other financing is available — a priming lien ahead of existing secured creditors (§ 364(d)). In practice, the DIP lender is usually the existing secured lender, and the DIP credit agreement is where the real control lives: milestones, budget covenants, and a sale timeline that can effectively decide the case before any plan is filed.

Exclusivity and the plan. For 120 days after the order for relief only the debtor may file a plan, and for 180 days only the debtor may solicit acceptances (§ 1121(b)–(c)); both periods are extendable but capped at 18 and 20 months. Before soliciting votes, the debtor must get court approval of a disclosure statement containing "adequate information" (§ 1125) — the securities-disclosure analogue of the bankruptcy world.

The traps for management. Do not pay pre-petition claims without an order. Do not let insiders get repaid on the way in — that is a one-year preference and a career-ending fact. Do not treat the case as a negotiation with the lender to the exclusion of the committee. And do not overlook the retention machinery: professionals must be disinterested and court-approved, and unapproved fees are unrecoverable.

Pillar 6 — Avoidance actions: preferences and fraudulent transfers

Avoidance is bankruptcy's clawback engine. It exists to enforce the collective principle: no creditor should do better than its peers just because it grabbed first or because the debtor liked it more.

Preferences — § 547. A trustee may avoid a transfer of the debtor's property (1) to or for the benefit of a creditor, (2) on account of an antecedent debt, (3) made while the debtor was insolvent (presumed for the 90 days before filing, § 547(f)), (4) within 90 days before the petition — or one year for an insider — and (5) that let the creditor receive more than it would have in a chapter 7. Note what is not an element: bad faith. Ordinary vendors get preference demands routinely, and the transfer being perfectly innocent is no defense.

The defenses are in § 547(c), and they are the whole game: the contemporaneous exchange for new value (a COD sale is not a preference), the ordinary course of business defense (the payment was consistent with the parties' historical course of dealing or with ordinary industry terms), and the subsequent new value defense (credit extended after the preferential payment offsets it). A 2019 amendment also requires the trustee to conduct "reasonable due diligence" — including consideration of a creditor's known affirmative defenses — before filing a preference action.

Fraudulent transfers — § 548 and § 544(b). Two theories. Actual fraud requires proof that the debtor made the transfer "with actual intent to hinder, delay, or defraud" creditors — proven, as always, by the badges of fraud (transfer to an insider, retained control, concealment, insolvency, lack of consideration). Constructive fraud requires no intent at all: the debtor received less than reasonably equivalent value and was insolvent, left with unreasonably small capital, or unable to pay its debts as they came due. Section 548's reach-back is two years — but § 544(b) lets the trustee step into the shoes of an actual unsecured creditor and use state fraudulent-transfer law, which in the roughly forty states that have adopted the Uniform Voidable Transactions Act (the 2014 revision of the UFTA) typically reaches back four years, and longer where the IRS is the triggering creditor. That is the doctrine that makes distressed-era transfers to a founder's spouse or a sibling LLC so dangerous, and it is the reason asset-protection planning must be done long before distress; see Domestic and Offshore Asset Protection Compared: A Wealth-Defense Field Guide.

The strong-arm power and the safe harbors. Section 544(a) gives the trustee the rights of a hypothetical judicial lien creditor as of the petition date — which means an unperfected security interest loses, full stop. Section 546(e) then carves out settlement payments and transfers made "by or to (or for the benefit of)" financial institutions, a safe harbor the Supreme Court narrowed considerably in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. 366 (2018), holding that courts look at the overarching transfer the trustee seeks to avoid, not the intermediate conduit banks it passed through.

Kestrel's exposure. In the 90 days before filing, Kestrel paid down $1.1 million of trade payables selectively, keeping its critical suppliers whole. Those payments are presumptively preferential. And eleven months before filing, it paid off a $400,000 loan from the founder's brother-in-law. That is an insider preference inside the one-year window and — if Kestrel was insolvent — potentially a constructively fraudulent transfer as well.

Pillar 7 — Executory contracts, leases, and IP licenses in bankruptcy

Section 365 is the most commercially consequential provision in the Code. An executory contract is one on which material performance remains due on both sides (the Countryman definition, adopted in substance nearly everywhere). The debtor has three choices.

Assume. Keep the contract — but only by curing all defaults, compensating for pecuniary loss, and providing adequate assurance of future performance (§ 365(b)(1)). Assumption is all-or-nothing: you cannot cherry-pick the favorable clauses.

Assume and assign. The commercial superpower. Under § 365(f), a debtor may assign an assumed contract notwithstanding an anti-assignment clause — the Code overrides the contract's own prohibition. This is what makes a leasehold or a supply agreement a saleable asset. There are limits, and one of them is a genuine circuit split worth knowing before you plan a case around an assignment. Section 365(c)(1) blocks assumption or assignment where "applicable law" excuses the counterparty from accepting performance from an entity other than the debtor. Federal patent and copyright law is such "applicable law": a non-exclusive IP license is generally not assignable without the licensor's consent. The fight is over what that does to assumption by a debtor in possession that has no intention of assigning to anyone. Courts applying the "hypothetical test" read the statute literally — if the debtor could not assign, it may not assume either, even to keep the license itself. Courts applying the "actual test" ask whether the debtor is actually proposing to assign, and let a debtor in possession that is staying put assume the license. The circuits are genuinely divided, the outcome can decide whether a technology company can reorganize at all, and venue selection is therefore a substantive decision, not a logistical one. Check the rule in the district where you plan to file.

Reject. Walk away. Rejection "constitutes a breach" of the contract (§ 365(g)) — and the Supreme Court made the consequences of that word explicit in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019): rejection is a breach, not a rescission. It gives the counterparty a pre-petition damages claim (usually pennies on the dollar), but it does not vaporize rights the counterparty already holds. A trademark licensee whose license is rejected may keep using the mark.

The IP-license seam. Congress had already addressed part of this in 1988, after Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), held that rejection stripped a patent licensee of its rights. Section 365(n) now lets a licensee of "intellectual property" — as defined in § 101(35A) — elect to retain its rights under a rejected license for the term, in exchange for continuing to pay royalties, while giving up the licensor's affirmative duties (support, upgrades, indemnity). But § 101(35A) covers patents, copyrights, trade secrets, and mask works — it does not list trademarks. Mission Product fills that gap by common-law reasoning. The practical drafting lesson for every license: negotiate the bankruptcy consequences up front, and where the licensee's business depends on the license, take a source-code or documentation escrow and a security interest in the licensed IP. See Intellectual Property Licensing: A Comprehensive Guide to Structuring and Negotiating License Agreements and The IP Transactions Toolkit: A Roadmap for Licensing, Assignments, and Diligence.

The lease deadline. For nonresidential real property, § 365(d)(4) imposes a hard clock: the debtor must assume or reject within 120 days of the order for relief, extendable by the court for cause by up to 90 more days — and beyond that only with the landlord's written consent. Miss it and the lease is deemed rejected and the premises must be surrendered. Meanwhile, § 365(d)(3) requires the debtor to perform all lease obligations arising after the petition, on time, pending assumption or rejection. On the landlord's side, § 502(b)(6) caps the rejection-damages claim at the greater of one year's rent or 15% of the remaining term (not to exceed three years). Every lease negotiation should be read with that cap in view; see Commercial Leases: A Comprehensive Guide to Negotiating and Drafting and Reviewing a Commercial Lease: A Practical Checklist.

Kestrel applies § 365. The Ohio plant lease is below market — Kestrel assumes it and, in the eventual sale, assigns it to the buyer over the landlord's objection. The patent coating license is essential and non-exclusive; Kestrel assumes it, cures the $80,000 arrearage, and braces for the licensor's argument that federal patent law is "applicable law" under § 365(c)(1) — which, in a hypothetical-test district, would bar Kestrel from even assuming the license, let alone assigning it to the buyer. Counsel prices that risk before choosing where to file, and opens a parallel negotiation to buy the licensor's consent. This is the kind of clause that should have been negotiated at the license stage, years earlier, and never was. The equipment lease is above market on obsolete machines; Kestrel rejects it, surrenders the equipment, and the lessor files a large, low-value unsecured claim.

Pillar 8 — Distressed M&A and the Section 363 sale

The § 363 sale is the workhorse of modern chapter 11. Rather than negotiate a plan with every constituency, the debtor sells the business as a going concern early, and fights about the money later.

The mechanics. Section 363(b) permits the sale of estate property outside the ordinary course after notice and a hearing. The standard is a sound business justification — the formulation of Committee of Equity Security Holders v. Lionel Corp., 722 F.2d 1063 (2d Cir. 1983), which remains the reference point. Section 363(f) is the magic: the sale may be free and clear of liens, claims, encumbrances, and interests, with the liens attaching to the proceeds in the same priority, if any of five conditions is met (including that the lienholder consents, or that the price exceeds the aggregate value of the liens, or that the interest is in bona fide dispute).

The auction architecture. A stalking-horse bidder signs an asset purchase agreement that sets the floor, in exchange for bid protections — a break-up fee (customarily 2–3% of purchase price) and expense reimbursement — approved by the court through a bidding-procedures order that sets qualification requirements, minimum overbids, and the auction date. A secured creditor may credit bid its debt as currency (§ 363(k)), and the Supreme Court held in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), that a plan cannot sell encumbered property free and clear while denying the lender that right. Section 363(m) then protects a good-faith purchaser: absent a stay pending appeal, a reversal generally will not unwind the sale — which is why objectors must seek a stay, not merely appeal.

Why buyers pay a premium for a 363 order. Because it delivers what no private APA can: a court order cutting off liens and, in most courts, most successor-liability claims. That protection is real but not absolute — the Third Circuit's decision in In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003), swept employment-discrimination claims into "interests" cut off by the sale, but other courts have declined to bar successor liability for tort or environmental claims, and no order can immunize a buyer from a claim arising out of the buyer's own post-closing conduct. Diligence in a distressed deal is the same discipline as any other acquisition, compressed into weeks; see Conducting Merger and Acquisition Due Diligence: A Practical Checklist, Mergers and Acquisitions: A Comprehensive Guide from Letter of Intent to Closing, and The Mergers and Acquisitions Toolkit.

The limit the Supreme Court drew. A § 363 sale cannot become a sub rosa plan — a distribution scheme dressed up as a sale, adopted without the votes and protections that plan confirmation requires. In Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Court held that a bankruptcy court may not approve a structured dismissal that distributes estate assets in violation of the Code's priority scheme over the objection of a disfavored class. Distribution requires a plan, or at least priority-respecting consent.

Kestrel sells. With Cordwain's DIP budget as the clock, Kestrel runs a 75-day sale process. A private-equity buyer signs a stalking-horse APA at $21 million for substantially all assets, including the assumed plant lease and the assumed coating license. Cordwain has the right to credit bid $18 million and uses it as a floor. The auction produces one overbid; the court approves the sale free and clear under § 363(f), with liens attaching to proceeds. Kestrel — now an empty shell holding cash and causes of action — files a liquidating plan to distribute the money.

Pillar 9 — Plan confirmation, cramdown, and discharge

A chapter 11 plan is a contract with the estate, imposed by court order. Its architecture is statutory.

Classification and voting. The plan places claims and interests into classes of "substantially similar" claims (§ 1122) and specifies each class's treatment (§ 1123). Classes that are unimpaired — whose legal, equitable, and contractual rights the plan leaves unaltered — are conclusively presumed to accept (§ 1126(f)); classes receiving nothing are deemed to reject (§ 1126(g)). Everyone else votes. A class of claims accepts if creditors holding at least two-thirds in dollar amount and more than one-half in number of the votes actually cast vote yes (§ 1126(c)).

Confirmation — § 1129(a). Sixteen requirements, of which four do the work:

§ 1129(a)(7) — the best-interests test. Every individual holder of a claim in an impaired class who votes no must receive at least what it would get in a chapter 7 liquidation. Note that this is a holder-by-holder test, not a class test: a class vote cannot bind a dissenter below the liquidation floor. This is why every plan comes with a liquidation analysis.
§ 1129(a)(8) — every class has accepted or is unimpaired. If this fails, you go to cramdown.
§ 1129(a)(10) — at least one impaired class has accepted, excluding insiders' votes. The gating requirement for cramdown.
§ 1129(a)(11) — feasibility. Confirmation is not likely to be followed by liquidation or the need for further reorganization. Courts are skeptical of hockey-stick projections.

Cramdown — § 1129(b). If a class dissents, the plan may still be confirmed if it is "fair and equitable" and does not "discriminate unfairly." For secured classes, "fair and equitable" means the lender keeps its lien and receives deferred cash payments with a present value equal to its collateral, or realizes the "indubitable equivalent" — and the interest rate is set under the formula approach of Till v. SCS Credit Corp., 541 U.S. 465 (2004) (prime plus a modest risk adjustment). For unsecured classes, "fair and equitable" means the absolute priority rule: no junior class may receive or retain anything on account of its junior interest unless the dissenting senior class is paid in full. That rule is what forces old equity out — and the "new value" workaround (equity contributes fresh capital for a new stake) survives only where the opportunity is market tested, per Bank of America National Trust & Savings Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999). Subchapter V dispenses with the absolute priority rule entirely, which is precisely why it matters so much to owner-operated businesses.

Discharge and the limits of § 105. Confirmation discharges a corporate debtor from pre-confirmation debts (§ 1141(d)), except that a plan that liquidates all the property and ends the business gives no discharge (§ 1141(d)(3)). For individuals, § 523 carves out fraud, fiduciary defalcation, willful and malicious injury, most taxes, domestic support, and student loans (absent undue hardship) — and Bartenwerfer v. Buckley, 598 U.S. 69 (2023), held that § 523(a)(2)(A) bars discharge of a debt obtained by fraud regardless of the debtor's own culpability — a debtor who neither knew of nor participated in her business partner's fraud may still be stuck with the debt.

The outer limit of plan power is now firmly marked. In Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), the Supreme Court held that the Code does not authorize a plan to extinguish claims against non-debtors without the affected claimants' consent. Nonconsensual third-party releases are out; genuinely consensual ones remain available, and the fight has shifted to what "consent" means. Read Purdue alongside Law v. Siegel, 571 U.S. 415 (2014): § 105(a) supplies equitable power to implement the Code, not to override it.

Pillar 10 — Special problems: IP, real estate, employment claims, and taxes

Intellectual property. Beyond § 365(n), three practical points. IP is property of the estate and can be sold under § 363 — including trademarks, though trademark law's own rules on assignment in gross (a mark cannot be sold apart from its goodwill) constrain the deal. Federal recordation of security interests in patents and copyrights is a genuine trap: perfection of a security interest in a registered copyright is generally accomplished by recording with the Copyright Office, while patents and trademarks are perfected under Article 9 by UCC-1 filing, with USPTO recordation serving other purposes. Get it wrong and § 544(a) makes the lien disappear. And trade-secret claims against a departing workforce do not evaporate in a sale; see Trade Secret Litigation Under the DTSA: A Comprehensive Guide.

Real estate. For individuals, § 1322(b)(2) forbids modifying a claim secured only by the debtor's principal residence — the anti-modification rule that saves home mortgages from cramdown. In commercial cases, watch § 362(d)(3)'s special rules for single-asset real estate debtors, which force the debtor to file a confirmable plan or start making interest payments within 90 days. Ground leases, mortgages, and title questions run on state law throughout; see The Real Estate Transactions Toolkit.

Employment claims. Wages and benefits earned in the 180 days before filing get priority up to the § 507(a)(4)–(5) cap; everything above the cap is a general unsecured claim. Post-petition wages are administrative expenses. Two statutes bite hard: the WARN Act (29 U.S.C. §§ 2101–2109) requires 60 days' notice of a mass layoff or plant closing, and a bankruptcy filing is not an exemption — the "liquidating fiduciary" and "faltering company" defenses are narrow and heavily litigated. And a debtor cannot simply reject a collective bargaining agreement under § 365; § 1113 imposes a demanding procedure of proposal, good-faith bargaining, and judicial findings, enacted in response to NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984). Retiree benefits get parallel protection under § 1114. Unpaid overtime and misclassification exposure travels with the estate; see Wage and Hour Law Under the FLSA: A Comprehensive Guide and The Employment Law Toolkit: From Hiring to Separation.

Taxes. Most tax claims get eighth-level priority (§ 507(a)(8)) and, for individuals, most are nondischargeable (§ 523(a)(1)). The killer is trust-fund taxes — the employee-withheld portion of payroll taxes. Those funds are held in trust for the United States, they are not really the debtor's property, and under 26 U.S.C. § 6672 the IRS may assess a 100% penalty personally against any "responsible person" who willfully failed to remit them. The automatic stay protects the debtor, not the CFO. Kestrel's two months of unremitted withholding is therefore not a corporate problem to be discharged; it is a personal liability for the founder and possibly the controller, and it should be paid before anything else. Where the failure to remit looks willful rather than merely desperate, the exposure can cross from civil penalty into criminal territory; see White-Collar Crime and Corporate Criminal Liability: A Comprehensive Guide. For the tax framework generally, see Business Taxation: A Comprehensive Guide to Entity Choice and Federal Income Tax and The Business Tax Toolkit.

The landscape as a working checklist

Use this as a gated audit of any distressed situation. Do not pass a gate until every box under it is true or consciously waived.

Gate 1 — Diagnose before you file

[ ] Thirteen-week cash flow built and stress-tested; date certain when cash runs out identified.
[ ] Capital structure mapped: every lien, its collateral, its perfection status, its priority.
[ ] Lien search run — an unperfected lien is a gift to the estate under § 544(a).
[ ] Personal guaranties, letters of credit, and co-obligors identified. The stay does not protect them.
[ ] Trust-fund payroll taxes quantified and, if possible, paid. (26 U.S.C. § 6672.)
[ ] Board briefed on its duties near insolvency under the state of incorporation's law — and told plainly that the duty does not "shift" to creditors in Delaware (Gheewalla); rather, creditors gain derivative standing to sue on the corporation's behalf.
[ ] D&O policy pulled and read: limits, exclusions, and how it responds to a trustee's suit.
[ ] Insider transfers in the last year identified and quantified before anyone is surprised by them.

Gate 2 — Choose the forum

[ ] Out-of-court options priced: workout, forbearance, Article 9 sale, ABC, receivership — with the state-specific ABC and receivership rules confirmed, not assumed.
[ ] Holdout risk assessed. Is there a creditor who can and will blow up a consensual deal?
[ ] Chapter eligibility confirmed under § 109 — including the current subchapter V debt ceiling.
[ ] Venue analyzed as a substantive choice, not a logistical one — especially the § 365(c)(1) hypothetical-vs-actual test if a critical IP license must be assumed.
[ ] Decision made and documented: reorganize, sell under § 363, or liquidate.

Gate 3 — The first 30 days

[ ] First-day motions prepared: wages, utilities (§ 366), cash management, critical vendors.
[ ] Cash collateral consent or motion, with adequate protection (§§ 361, 363(c)).
[ ] DIP financing term sheet reviewed for control terms, milestones, and priming (§ 364).
[ ] Creditor matrix accurate; § 341 meeting calendared.
[ ] Executory contract and lease inventory built, with the § 365(d)(4) clock docketed.

Gate 4 — Creditor-side discipline

[ ] All collection activity halted, in every system, on notice of filing (§ 362).
[ ] Bar date docketed; proof of claim filed with documentation (Fed. R. Bankr. P. 3001–3003).
[ ] § 503(b)(9) twenty-day goods claim asserted if applicable.
[ ] Setoff and reclamation rights preserved (§§ 553, 546(c)).
[ ] Preference exposure assessed; ordinary-course and new-value defenses documented now, not in two years.

Gate 5 — Sale or plan

[ ] Bidding procedures, stalking horse, and bid protections approved.
[ ] § 363(f) grounds established for each lien and interest to be cut off.
[ ] Credit-bid rights respected (§ 363(k); RadLAX).
[ ] Plan classes tested against §§ 1122, 1126, 1129(a)(7), (a)(10), (a)(11).
[ ] Cramdown analysis run, including the absolute priority rule and Till rate.
[ ] Any third-party release is consensual and documented as such (Purdue Pharma).

Primary Authority

Statutes — Title 11 (the Bankruptcy Code). §§ 101(35A) (definition of intellectual property), 105 (equitable powers), 109 (eligibility), 361 (adequate protection), 362 (automatic stay), 363 (use, sale, or lease of property, including 363(f) free and clear, 363(k) credit bidding, 363(m) good-faith purchaser), 364 (DIP financing), 365 (executory contracts and leases, including 365(d)(3)–(4) and 365(n)), 366 (utilities), 502 (allowance of claims; 502(b)(6) landlord cap), 503(b)(9) (twenty-day goods), 506 (secured status), 507 (priorities), 522 (exemptions), 523 (exceptions to discharge), 524 (discharge injunction), 541 (property of the estate), 544 (strong-arm and state-law avoidance), 546 (limitations and safe harbors), 547 (preferences), 548 (fraudulent transfers), 549 (postpetition transfers), 550 (recovery), 553 (setoff), 726 (chapter 7 distribution), 727 (chapter 7 discharge), 1102 (committees), 1107 (debtor in possession), 1109(b) (party in interest), 1113–1114 (CBAs and retiree benefits), 1121 (exclusivity), 1122–1123 (classification and contents), 1125 (disclosure statement), 1126 (voting), 1129 (confirmation and cramdown), 1141 (effect of confirmation), 1181–1195 (subchapter V).

Other statutes. 26 U.S.C. § 6672 (trust-fund recovery penalty); 28 U.S.C. §§ 157, 754, 959 (bankruptcy jurisdiction and receiverships); 29 U.S.C. §§ 2101–2109 (WARN Act); 15 U.S.C. § 1692 et seq. (Fair Debt Collection Practices Act); 15 U.S.C. § 77ppp(b) (Trust Indenture Act § 316(b), limiting out-of-court impairment of the right to payment); Uniform Commercial Code Article 9, §§ 9-609, 9-610, 9-620.

Rules. Fed. R. Bankr. P. 3001–3003 (proofs of claim and bar dates), 6004 (sales), 7001 (adversary proceedings), 9019 (settlements); Official Form 410. Fed. R. Civ. P. 66 (receivers).

Uniform and state law. Uniform Voidable Transactions Act (the 2014 revision of the Uniform Fraudulent Transfer Act, adopted in most states) — this is the operative fraudulent-transfer law reached through § 544(b), and it is state law; Uniform Commercial Real Estate Receivership Act (adopted in a minority of states); state assignment-for-benefit-of-creditors statutes (e.g., 10 Del. C. § 7381 et seq.; Cal. Code Civ. Proc. § 1800). Corporate governance — including directors' duties in the vicinity of insolvency — is state law, and this toolkit uses Delaware as its reference point. Exemptions, liens, receiverships, ABCs, insurance-coverage rules, unfair-trade-practice statutes, and fraudulent-transfer reach-back periods are all state-specific. There is no nationwide rule on any of them. Confirm your jurisdiction's.

Cases. Butner v. United States, 440 U.S. 48 (1979); Local Loan Co. v. Hunt, 292 U.S. 234 (1934); NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984); North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) (Delaware: no direct creditor fiduciary claim in the zone of insolvency; derivative standing on insolvency); Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1986); Committee of Equity Security Holders v. Lionel Corp., 722 F.2d 1063 (2d Cir. 1983); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985); Bank of America National Trust & Savings Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999); In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003); Till v. SCS Credit Corp., 541 U.S. 465 (2004); Stern v. Marshall, 564 U.S. 462 (2011); RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012); Law v. Siegel, 571 U.S. 415 (2014); Wellness International Network, Ltd. v. Sharif, 575 U.S. 665 (2015); Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017); Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. 366 (2018); Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019); Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020); Bartenwerfer v. Buckley, 598 U.S. 69 (2023); Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268 (2024); Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024).

Secondary Sources

Collier on Bankruptcy (the standard treatise; start here for any Code section); Norton Bankruptcy Law and Practice; the American Bankruptcy Institute's practice materials and the reports of its commissions on chapter 11 reform; and, for the state-law layer, the Uniform Law Commission's comments to the Uniform Voidable Transactions Act.

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This toolkit is general legal information from UpLaw (uplaw.us), not legal advice, and does not create an attorney-client relationship. Laws vary by state and change over time; verify current requirements and consult qualified counsel before acting.