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Bankruptcy Questions Answered: What is a Chapter 11 Reorganization Plan?

Chapter 11 Bankruptcy Lawyer Helping a Client

If your business is in a place where bankruptcy seems like the best way forward, it’s likely that you’ll be looking at a chapter 11 filing. Unlike chapters 7 and 13, chapter 11 bankruptcy is a way for businesses of all sizes to reorganize debt and initiate a plan to repay creditors, all while keeping their doors open. 

What is Chapter 11 Bankruptcy?

Put simply, chapter 11 is a form of bankruptcy that provides for the reorganization of debt as opposed to liquidation of assets. It is typically employed by business owners to keep a company running while restructuring finances. Chapter 11 allows for the maximum benefits to creditors and a fresh start for debtors who fulfill the repayment plan.

Chapter 11 bankruptcy begins with the filing of a bankruptcy petition, along with the submission of forms that expand on the debtor’s financial situation. The main goal of chapter 11 bankruptcy is to preserve the economic impact of a company and the jobs it supports, whether of employees or vendors. Unlike some other forms of bankruptcy that appoint a case trustee, the U.S. Trustee Program plays a major role in chapter 11 filings, conducting the meeting of creditors and monitoring operating expenses, employee compensation, and the debtor’s general compliance with the agreed upon reorganization plan. 

What is the Chapter 11 Reorganization Plan?

The reorganization plan is key to the debtor’s eventual relief, since it sets the terms and timing for repayment. This plan will include details that clearly show any structural changes that would allow the business to continue to operate. Typical information included could be details about potential downsizing, debt negotiation, and even asset liquidation. The core purpose of the reorganization plan is to put down on paper exactly how creditors will be repaid while the business simultaneously remains open. 

Once a chapter 11 filing is made, there is a following “exclusivity period” that gives the debtor the exclusive right to devise and share their reorganization plan. This period is generally about four months’ time, or roughly 120 days. If the task is especially difficult or complex, it’s sometimes possible to petition the court for an extension. Once the debtor has a plan worked up, they’ll then share that with creditors who will look it over and either accept it or raise objections. A plan must also pass the “fair and equitable” test which ensures that secured creditors are reimbursed for the value of collateral. But if the exclusivity period ends without a reorganization plan in hand, then creditors are able to propose their own plan.

For a plan to be confirmed, outstanding business debts must be clearly notated, along with the respective class of creditors––whether priority, unsecured, or secured. It’s also important to make note of which creditors will be paid in full, along with specific details about their repayment. Those creditors whose original contracts with the debtor allow for partial repayment are referred to as “impaired” creditors. If this type of creditor is part of the proceedings, then for a filer’s reorganization plan to be confirmed at least one creditor from the impaired category must approve it. 

At this point, a confirmation hearing is held. Once creditors agree to a plan and the court finds it to be feasible, proposed in good faith, in the best interest of the creditors, and both fair and equitable, the plan will be confirmed and repayment can begin. Once all obligations are fulfilled after the typical three- or five-year term, a debtor will then be free and clear.

Potential Issues

As noted above, if the exclusivity period ends without a clear reorganization plan in place, creditors can propose their own plan. If there end up being multiple or competing plans, that situation could result in litigation and even more complications. At that point, if creditors aren’t satisfied, the U.S. Trustee could ask the court to either dismiss the case or convert it to a chapter 7 bankruptcy. If chapter 7 is approved by the court, the business in question would then have to be liquidated to repay creditors. If the case is dismissed, the debtor is back at square one. Even after a plan is passed, a Chapter 11 case can fail for many reasons. Some of these include a lack of financing and failure to file monthly operating reports, fulfill plan obligations, or pay quarterly fees. 

Clearly, there is a lot involved in a traditional chapter 11 bankruptcy filing. Due to the complexity alone, a business owner could opt instead for a chapter 7 filing, preferring to just shut down operations and use assets to repay creditors. For those who would rather keep doors open and employees working, it is absolutely vital to work with a seasoned bankruptcy attorney. That’s especially true when it comes to drafting a feasible bankruptcy reorganization plan that works for all parties involved.

How The SBRA Can Help

The unwieldy, complex nature of chapter 11 bankruptcy filing has long been lamented by legal professionals and business owners alike. And the high financial costs of this type of filing often put it well out of reach of small businesses. These concerns didn’t go unnoticed, and on August 23, 2019, amendments to the Bankruptcy Code known as the Small Business Reorganization Act (SBRA) became law. The SBRA works to lower overall costs for small businesses to file chapter 11 bankruptcy while also streamlining the plan confirmation process. One key aspect of this simplification is that only the debtor is permitted to file a reorganization plan, eliminating many contested hearings and any potential competing plans.

Essentially any plan that accounts for all projected disposable income to be used to repay creditors over a period of three to five years is likely to be approved. Through lowered costs and a pared down plan confirmation process, the SBRA can offer another viable option to small businesses in financial trouble. This allows the business owners to survive bankruptcy while still keeping operations running and retaining control of their company.

Choose an Experienced Ohio Bankruptcy Lawyer

If you are a business owner who’s staring down debt, bankruptcy could be a clear path to recovery. But if a chapter 11 filing is your best or only option, the complexity could be overwhelming. That’s why your first step should be a consultation with an experienced bankruptcy attorney. At Bates and Hausen, LLC, you’ll have the expertise and skills of John R. Bates and James F. Hausen on your side. Together they have provided over 50 years of legal expertise, serving the Akron, Canton, Wooster, Dover, and New Philadelphia areas. Contact Northeast Ohio Bankruptcy Attorneys to set up a free consultation. Find out today if chapter 11 bankruptcy could help your business repay debts and get on track financially.

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