Developing a Chapter 11 Bankruptcy Reorganization Plan

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Chapter 11 is a bankruptcy option available to corporations, sole proprietorships, and individuals, but is most commonly filed by larger corporations or businesses. This type of filing is usually undertaken in order to reorganize and restructure complex debts. It allows a troubled company to stay in business and conduct its normal operations, including selling stock, without having to liquidate its assets. However, while in Chapter 11, a business owner cannot expand his or her company, sell off property or equipment, or buy other companies without the permission of the court.

A Chapter 11 filing will involve the drafting of a debt restructuring plan, wherein a company discloses its assets and compiles a list of creditors. What are known as creditor’s committees will be in charge of overseeing payments to the creditors.

Creditors’ Committees

When a company is filing for Chapter 11 bankruptcy, committees of creditors and stockholders are typically involved in negotiating a plan with the company to relieve some repayments of debt so that the company can try to get back on track. As with other forms of bankruptcy, the court will often assign a trustee to oversee the process. This trustee can organize creditors’ committees called official committees of unsecured creditors. They represent all unsecured creditors, including bondholders.

If the company has publicly-held bonds, the indenture trustee, often a bank hired by the company when it originally issued a bond, may sit on the committee. A stockholder’s representative may sit on the creditors’ committee or a committee may be formed to represent stockholders. The trustee may create an additional committee to represent the interests of secured creditors, or lien holders, and employees.

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Who Typically Develops the Plan?

A business debtor has 120 days to develop and file a repayment plan with the bankruptcy court. In some cases, the court will extend this time to 18 months. After the time a company owner has to file passes, other parties of interest, such as creditors or stockholders, may file reorganization plans.

If a trustee is appointed, the trustee may also file a bankruptcy plan. The courts will usually transfer control from a company owner to a trustee if after the bankruptcy papers are filed and a Chapter 11 plan is underway, gross mismanagement or fraudulent activities have occurred. The bankruptcy may also become a Chapter 7 filing—which means a total liquidation of assets and an end to the company—if a business owner does not follow the terms of a plan.

Process for Developing a Reorganization Plan

A debtor works with the creditor committees throughout the process of drafting a Chapter 11 plan; a disclosure statement will need to be drafted and submitted to the U.S. Securities and Exchange Commission (SEC) for review as well. Once the repayment plan has been developed, creditors—and in some cases stockholders—have the opportunity to vote on the plan. In some situations, the court may continue with the bankruptcy even if the stockholders vote against the plan. Next the bankruptcy court will have to verify that the plan complies with the Bankruptcy Code before it can be implemented. This process is known as plan confirmation and is usually completed within a few months; but in some cases, it can take years. Once the court confirms the bankruptcy plan, the company begins carrying out payments and distributions according to the agreement.

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