In Chapter 11, a plan is submitted, much like in a Chapter 13 case. The filer has 120 days to propose a reorganization plan. The reorganization proposal must provide structure as to how the business will continue to operate. Normally, the plan will include information about downsizing the business, negotiating debts, and liquidating assets within the business. The purpose of the plan is to show creditors how they will be repaid and how the business will be able to continue running.
Whether a reorganization plan will be confirmed lies within the discretion of the bankruptcy court and depends on whether one or more creditors approve of a filer’s plan as well as any objections to the plan. For a plan to be confirmed it must identify what business debts are outstanding, identify each class of creditors (priority, unsecured, secured), identify which creditors will be paid in full, and provide details explaining how the creditors will be repaid.
Generally, filers have an exclusive right to file a plan of reorganization for four months after the Chapter 11 case is filed. Filers may be given a chance to ask the court to extend the exclusivity period to file a Chapter 11 plan up to 18 months as long as a good-faith effort is shown.
Once the exclusivity period ends and the filer has not confirmed a reorganization plan, creditors may propose a plan of reorganization or liquidation plan to the bankruptcy court. Competing plans create litigation which can cause greater involvement of the U.S. Trustee. Generally, creditors don’t offer competing plans instead, creditors who are not satisfied with the plan will ask the court to dismiss or convert the case to a Chapter 7 bankruptcy.
In Chapter 11, unsecured creditors can form a creditor’s committee under 11 U.S.C. § 1102. The creditor’s committee will vote to approve or deny the filer’s reorganization plan. Sometimes, not all creditors are paid back in full according to the terms of their original contract. These creditors are usually referred to as “impaired.” For the plan to be confirmed it is required that at least one class of impaired creditors must vote to accept the plan.
To determine whether a plan will be confirmed a confirmation hearing will be held. A plan will only be confirmed by the bankruptcy court if it is feasible, proposed in good faith, in the best interest of the creditors, and meets the fair and equitable test. The fair and equitable test ensures that secured creditors will be paid the value of their collateral.
What if the Chapter 11 Plan Fails?
A Chapter 11 reorganization can fail just like any other bankruptcy case. Some of the most common reasons that a Chapter 11 case may fail are:
- failure to obtain financing,
- failure to file monthly operating reports,
- failure to pay plan obligations to creditors, and
- failure to pay quarterly fees.
When a Chapter 11 bankruptcy case fails, the U.S. Trustee will ask the court to dismiss the case. In some cases, the U.S. Trustee may move to convert the case to a Chapter 7 bankruptcy instead. When this happens any available business assets may be sold to pay creditors in a Chapter 7 liquidation. Individuals who wish to preserve the assets will need to make deals with the bankruptcy trustee and their outstanding creditors.
Generally, large and small businesses or persons with very complex financial affairs, that cannot file a Chapter 7 or 13 cases should consider Chapter 11. Most individuals and businesses that need debt relief will not need to file Chapter 11. In most cases, small businesses may find the Chapter 11 process unaffordable and burdensome. Typically, these businesses may find that shutting down the business and filing a Chapter 7 bankruptcy is a better and much more cost-efficient decision.
The Chapter 11 process is very complicated and requires the assistance of a very experienced bankruptcy attorney who can help create a feasible bankruptcy reorganization plan. Not all bankruptcy attorneys and law firms handle Chapter 11 cases. Thus, individuals who are considering filing a Chapter 11 bankruptcy should seek out a bankruptcy attorney who specializes in Chapter 11 to help them navigate this complex area of bankruptcy law.