Best Interests of Creditors in Chapter 11 Bankruptcy: What Does It Mean?
Chapter 11 bankruptcy is a type of reorganization bankruptcy that is typically filed by businesses, but in some cases, an individual will also file for personal bankruptcy under Chapter 11. In general, Chapter 11 bankruptcy is similar to Chapter 13 bankruptcy, but it has more requirements and complications. Since businesses are not eligible for Chapter 13 bankruptcy, they will usually need to file for Chapter 11 bankruptcy if they want to remain in business and to catch up on debts owed to creditors. There are some businesses, of course, that will qualify for Subchapter V and other types of reorganization bankruptcy. Individuals only need to file for Chapter 11 instead of Chapter 13 if they have so much debt that they cannot qualify for Chapter 13. As part of a Chapter 11 bankruptcy, the court will need to confirm a debtor’s reorganization plan.
In order to confirm a debtor’s reorganization plan, the plan must be in the best interests of the creditors. What does it mean for a reorganization plan to be in the best interests of creditors? Our West Palm Beach bankruptcy attorneys can explain.
Understanding the Requirements to Confirm a Chapter 11 Reorganization Plan
Before we explain the “best interests of creditors” requirement, we want to provide you with more background information about the requirements for confirming a Chapter 11 reorganization plan. In general, a debtor in a Chapter 11 case can propose its own reorganization plan, but if the plan does not meet the general requirements set forth under US bankruptcy law, then the court will not confirm the plan, and creditors can propose a plan that meets the requirements.
In addition to the “best interests of creditors” requirement, Chapter 11 reorganization plans must be feasible, and they must be fair and equitable. Additional requirements may be necessary in some Chapter 11 cases, so it is critical to discuss the requirements of your business’s reorganization plan with an attorney.
Defining the Best Interests of Creditors
The US Bankruptcy Code sets forth the requirements that a Chapter 11 reorganization plan must be in the best interests of creditors. The test for determining whether or not this requirement has been met is clarified in a US Supreme Court case, United States v. Reorganized CF&I Fabricators of Utah (1996). That test says that any holder of an “impaired claim or interest” must either accept the plan, or receive as much repayment as they would if the bankruptcy were a Chapter 7 liquidation.
To clarify all of this, a holder of an impaired claim or interest is a creditor who would be receiving less than what they are actually owed according to the reorganization plan. So, for example, if a creditor is owed $10,000 but is only set to receive a total of $5,000 under the terms of the reorganization plan, that creditor would be a holder of an impaired claim or interest. Then, for those creditors, there are two ways in which the plan can be confirmed in the best interests of creditors. Either:
- Holder of the impaired claim or interest (i.e., the creditor receiving less than what they are owed) consents to the terms of the reorganization plan; or
- Under the terms of the reorganization plan, the holder of the impaired claim or interest (i.e., the creditor receiving less than what they are owed) would receive at least the same amount of money that they would have received if the debtor’s assets were liquidated in a Chapter 7 case and creditors were paid from the liquidated bankruptcy estate.
Contact a West Palm Beach Bankruptcy Attorney Today
Do you have questions about a Chapter 11 reorganization plan or Chapter 11 filing more generally? One of the experienced West Palm Beach bankruptcy lawyers at Kelley Kaplan & Eller, PLLC can assist you today. Contact us for assistance with your business bankruptcy case.
Sources:
law.cornell.edu/wex/chapter_11_bankruptcy
law.cornell.edu/uscode/text/11
supreme.justia.com/cases/federal/us/518/213/
