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Chapter 11 Plan Basics

By Andrea Campbell Davidson

 

Welcome to the latest installment of bankruptcy bullets. This quarter, we’re discussing the Chapter 11 plan. Once a business or individual finds itself in a chapter 11 bankruptcy, how does it get out? In most cases, the debtor proposes a chapter 11 “plan” to pay its creditors, either all at once or over time, and to emerge from bankruptcy protection. A chapter 11 plan is usually a plan of “reorganization,” meant to restructure the debtor’s assets and debt and allow the debtor to continue on with its business (or, in the case of an individual, life!). However, a debtor may also use a chapter 11 plan to liquidate its assets, sometimes using a plan administrator or liquidating trustee to do so.

 

Exclusivity

By statute, a chapter 11 debtor has the exclusive right to propose a chapter 11 plan for 120 days after the order for bankruptcy relief (or less, if the debtor is a small business debtor). This exclusivity period may be extended or shortened by the court, but in no circumstances may it last longer than 18 months. Once a debtor’s exclusivity period expires, other parties in interest are permitted to propose their own plans to reorganize or liquidate the debtor’s assets. Secured creditors or unsecured creditors’ committees sometimes propose plans that compete with the debtor’s own plan.

 

The Disclosure Statement

Before a plan can be confirmed, a debtor (or other party in interest, if exclusivity has expired) must file and have approved a disclosure statement describing the plan. The disclosure statement must contain “adequate information,” or enough information that a creditor can make an informed decision whether to vote for or against the plan. To determine whether a disclosure statement contains “adequate information,” and should be approved, courts look at a non-exclusive list of factors, including: an account of the circumstances leading to bankruptcy, a description of the debtor’s assets, a summary of the plan of reorganization or liquidation, the expected distribution to creditors, and the potential tax consequences of the plan.

 

Plan Requirements

A plan of reorganization may only be confirmed by the bankruptcy court if it meets certain requirements described in the bankruptcy code. In short, the plan must be proposed in good faith, must provide for the payment of any administrative expenses, must classify claims against the bankruptcy estate (only similar claims may be classified together) and must provide for treatment for each class of claims. A chapter 11 plan must also be “feasible,” such that the debtor will be able to carry out its provisions, and must include a liquidation analysis showing that the debtor’s creditors will receive greater value from the chapter 11 plan than they would if the debtor had liquidated its assets through a chapter 7 bankruptcy.

 

Plan Confirmation

The debtor (or other plan proponent) may solicit votes on the plan once the disclosure statement is approved. Any class of creditors that is “impaired,” or not entitled to receive 100% of its claim under the plan, may vote on the plan. The plan is eligible to be confirmed so long as each impaired class of creditors votes for the plan, or so long as the debtor is able to “cram down” a rejecting impaired creditor by showing that the plan is fair and equitable and does not discriminate unfairly against any particular creditor class.

 

Plan confirmation is tricky business! More detailed information about exclusivity, disclosure statement approval or plan confirmation can be found in the Bankruptcy Code, 11 U.S.C. § 101 et seq.