reorganization

Reorganization is a restructuring of the ownership, legal, operational, or financial arrangement of a business. It may occur outside bankruptcy through a merger or consolidation, recapitalization, spin-off, asset transfer, debt restructuring, or change in corporate form. A business may reorganize to address financial distress, change ownership or control, separate business lines, improve operations, or pursue a different strategy. Because the term is used in corporate, tax, and bankruptcy law, the legal consequences depend on the context.

Under federal income tax law, Internal Revenue Code § 368 identifies several categories of corporate reorganization, including statutory mergers or consolidations; certain acquisitions of another corporation's stock or assets; certain transfers followed by qualifying distributions; recapitalizations; changes in a corporation's identity, form, or place of organization; and certain transfers in a Title 11 or similar case. If all applicable requirements are satisfied, related provisions, including Internal Revenue Code § 354 and Internal Revenue Code § 361, may provide nonrecognition of gain or loss for certain exchanges by shareholders, security holders, or participating corporations. Not every business restructuring qualifies under § 368, and qualification does not necessarily make every part of a transaction tax-free.

In bankruptcy law, Chapter 11 generally provides a process for reorganization. It is commonly used by businesses, although individuals may also be eligible. The debtor ordinarily remains in control as a debtor in possession unless a trustee is appointed. A Chapter 11 plan generally must designate classes of claims and interests, identify impaired classes and their treatment, and provide adequate means for implementation. A plan may retain, transfer, or sell property; merge or consolidate the debtor with another entity; modify liens or debt instruments; cure defaults; extend maturity dates or change interest rates; issue securities; and assume, reject, or assign executory contracts or unexpired leases. A plan may also sell all or substantially all estate property and distribute the proceeds, so Chapter 11 can result in liquidation rather than continued operation.

Holders of claims or interests in impaired classes ordinarily may vote to accept or reject a plan. The bankruptcy court may confirm the plan only if the requirements of Bankruptcy Code § 1129 are satisfied. In some circumstances, the court may confirm a plan over the rejection of an impaired class through cramdown if the plan does not discriminate unfairly and is fair and equitable with respect to that class. A confirmed plan generally binds the debtor, creditors, and equity holders whether or not they accepted it. Confirmation may discharge preconfirmation debts, but the scope and timing of discharge depend on § 1141, the debtor, the plan, and statutory exceptions.

Reorganization is therefore broader than simply keeping a financially distressed company alive. Depending on the legal context, it may describe an internal business restructuring, a transaction receiving specified federal tax treatment, or a court-supervised adjustment or liquidation of debts and assets.

[Last reviewed in August of 2026 by the Wex Definitions Team]

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