How Does a Reorganization Plan Work in Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a type of reorganization bankruptcy that is commonly used by businesses, although it is occasionally filed by individuals, too. As a type of reorganization bankruptcy, Chapter 11 bankruptcy does not involve asset liquidation but instead involves a reorganization plan through which the debtor repays creditors over a period of time. At the end of the terms of the reorganization plan, the business debtor may be eligible to have some unsecured, nonpriority debts discharged and an opportunity to run their business without the burden of unpaid debt.
Many businesses choose to file for Chapter 11 bankruptcy because it is a type of bankruptcy that does not require the business to close and liquidate its inventory (as Chapter 7 business bankruptcies require). Yet for a Chapter 11 case to be successful, the reorganization plan must be successful. How does a Chapter 11 reorganization plan work? Consider the following information from our West Palm Beach bankruptcy lawyer.
Process for Proposing a Chapter 11 Plan
The debtor who files for Chapter 11 bankruptcy will typically develop the reorganization plan with assistance from a bankruptcy attorney — for the first 120 days after filing the Chapter 11 petition, the debtor has the sole right to develop and propose the terms of the reorganization plan. After the debtor completes the plan, creditors then have an opportunity to vote on the plan.
If a debtor is not making an effort to create a reorganization plan, a creditor may be able to challenge the period of exclusivity in which only the debtor can submit a plan. After the 120-day period, creditors can propose terms of a reorganization plan.
How is a Chapter 11 Plan Approved?
In order for a Chapter 11 plan to be approved by the bankruptcy court, Section 1129 of the US Bankruptcy Code requires that the plan meet all of the following requirements:
- Plan is feasible given the debtor’s financial circumstances;
- Plan has been proposed in good faith;
- Creditors will receive at least the same amount of money they would have received if the debtor had filed for Chapter 7 bankruptcy and liquidated all bankruptcy assets; and
- One or more classes of impaired creditors must approve the plan.
Even when there is disagreement about approving the plan among creditors, the court may be able to approve the debtor’s proposed reorganization plan based on cramdown provisions. Once the plan is approved, it essentially becomes a contact between the debtor and the creditors.
Contact Our West Palm Beach Bankruptcy Lawyers for Assistance with Your Case
If your business is considering a Chapter 11 bankruptcy filing, it is critical to understand how the reorganization plan works in this type of bankruptcy case and to have a lawyer assisting you throughout the process. To find out more about Chapter 11 bankruptcy or to begin the tasks necessary to file a Chapter 11 bankruptcy petition, you should get in touch with one of the experienced West Palm Beach bankruptcy attorneys at Kelley, Fulton, Kaplan & Eller as soon as possible. Our firm regularly represents businesses in South Florida in a wide range of bankruptcy matters, and we can begin working with you on all aspects of your Chapter 11 bankruptcy filing. Contact us today for more information about how we can assist you.
Sources:
uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics
justice.gov/ust/ust-regions-r18/file/small_business_b425a_idaho.pdf/dl
