What Is a Plan of Reorganization in Chapter 11 Bankruptcy?

What is a Plan of Reorganization in Chapter 11 Bankruptcy?

Many people are familiar with Chapter 11 cases filed by large businesses like General Motors, Toys R Us, and Pier 1 because of the news coverage they generate. While

Chapter 11 is often used by businesses to restructure debt, a key part of any Chapter 11 case is the debtor's plan of reorganization. The plan of reorganization outlines how the debtor will pay back creditors over time. In order to move forward with the plan of reorganization, the creditors must accept it through a voting process,and the court must confirm it.

Chapter 11 is Not Just for Businesses

Chapter 11 bankruptcy can be a good option for individual debtors who want to reorganize a lot of debt in order to protect assets. Chapter 11 may also be available to some individual debtors whose debt totals are higher than the debt limits allowed when filing a Chapter 13 case.

Learn more about debt limits for Chapter 13 at What are Chapter 13 Bankruptcy Debt Limitations?

Read about how Chapter 11 and Chapter 13 differ at Chapter 13 v. Chapter 11 for Small Business Owners

Chapter 11 allows a debtor to stay in control of its assets and business affairs while it negotiates new and more favorable terms with its creditors. Unlike Chapter 7, the court in a Chapter 11 case does not automatically appoint a trustee to oversee liquidation of assets or payment of claims.

A Chapter 11 filed by an individual often includes a mix of personal debt (like credit cards and medical bills) and business debt (like mortgages on business property or sales taxes). The debtor is not limited to using Chapter 11 to renegotiate only business debt. Debtors often use Chapter 11 to negotiate new terms on personal debt as well.

What Happens in a Chapter 11 Bankruptcy?

Chapter 11 bankruptcies are often filed by businesses or high net-worth individuals. The goal of a debtor who files for Chapter 11 is to preserve his or her assets through the process of reorganization.

Once you file a Chapter 11 bankruptcy petition, the automatic stay takes effect to stop most collection efforts against you. You also become what's called a debtor-in-possession, which means that you retain control of your assets and can continue to run your business. Over the course of the bankruptcy proceeding, you will be responsible for following rules that require you to submit various reports, fees, and documents. The court requires that these rules be strictly followed.

The plan of reorganization is one of the most important documents that you will submit in a Chapter 11 bankruptcy. If your business is filing Chapter 11, once your plan is accepted by the creditors and confirmed by the court, your dischargeable debt (debt that you are no longer responsible for) will be erased. However, you must still act in accordance with any terms set forth by the plan itself. If you are filing for Chapter 11 as an individual (and not for your business), you won't get the discharge until you have made all payments under the plan.

When Do I Submit My Plan of Reorganization?

For the first 120 days after you file the Chapter 11 case, you have an exclusive right (a right belonging solely to the debtor) to file a plan of reorganization If the court approves your request, you may be able to extend this time period for up to 300 days. Once the period of exclusivity is over, your creditors or case trustee, if appointed, can submit a competing plan. It's usually better to submit the plan of reorganization within the period of exclusivity in order to get the most favorable terms and proceed with your case in a timely manner.

Elements of the Plan of Reorganization

A Chapter 11 plan of reorganization must contain certain provisions. It must

• Define each class of creditors and explain how the claims for each class of creditors will be treated. The classes of claims are usually categorized as:
  • Secured creditors (debt backed by collateral)
  • Priority unsecured creditors (debt not backed by any collateral and will be paid before those of nonpriority debt holders)
  • General unsecured creditors (debt not backed by any collateral and will be paid after priority unsecured creditors), and
  • Equity security holders (hold an equity security of the debtor such as a shareholder interest).
• Identify which classes are impaired (have special voting rights because the class members will not be paid according to their original terms.)
• Provide for equal treatment of all members of a class
• Classify secured debts separately, unless they have common elements, and
• Provide for adequate means to implement its provisions.

The plan may provide for other items, but it is not required to include these elements:

• Change payment terms for a class,
• Provide for assumption or rejection of executory contracts (uncompleted contracts of the debtor),
• Provide for sale of estate assets,
• Provide for settlement or adjustment of claims belonging to the estate, such as turnover of property or avoidance claims, and
• Contain any other provisions that do not conflict with the reorganization of the estate or the bankruptcy code.

Who Will Vote on My Plan?

Once you submit your plan of reorganization, creditors who are impaired (that is, those that will receive less than the full value of the submitted claim) will be allowed to vote by ballot. At least one class of impaired creditors must accept the plan before the court can confirm it. Any creditors whose claims will be paid in full under the plan are presumed to vote "Yes."

Example: You filed Chapter 11 to reorganize personal debt and debt you owe on your day care business. Your plan of reorganization divided your debt into the following categories:

• Secured: your mortgage loan on the day care. This is an impaired debt because you are reducing the interest rate.
• Secured: your home mortgage. This category is not impaired.
• Priority Unsecured: past due child support: This category is impaired because you are proposing to pay it in installments after it was originally due.
• Nonpriority Unsecured: This category is impaired because you are proposing to pay each allowed claim 60% of the claimed amount.

In this example, the home mortgage creditor is presumed to vote "Yes" because it will be paid in full and is not otherwise an impaired claim. The other categories are all impaired. At least one of these categories must vote for the plan before the court can approve it.

In certain instances, the court will confirm a plan even when an impaired class of unsecured creditors has voted against it. This is called a "cramdown." The court will confirm the plan via cramdown only if it does not discriminate unfairly and is fair and equitable with respect to each class of impaired creditors.

Changing the Plan of Reorganization

If you need to change or modify your plan of reorganization, you may do so at any time before plan confirmation. If the modification takes place after the balloting, a hearing will be held to determine whether the proposed modification negatively affects any creditors who have not accepted the modification in writing. If the court decides that there will be an adverse impact on those creditors, another round of ballots must be taken before the modification can be accepted.

Competing Plans

Once your period of exclusivity is over, other creditors or a case trustee (if appointed) have the option to submit their own plans of reorganization. Creditors must vote to accept these competing plans before they move forward with the court confirmation process. In deciding which plan of reorganization to confirm, the court will consider the interests of the creditors and equity security holders.

When Will the Court Confirm My Plan of Reorganization?

If no one files an objection to your plan of reorganization, the court will hold a confirmation hearing. In order for your plan to be confirmed by the court, it must meet certain requirements:

• the plan must be feasible (have the ability to succeed),
• you must have proposed the plan in good faith,
• the plan must be in the best interests of the creditors (this involves a test showing that the creditors will receive at least as much under the plan as they would have had the case been converted to a Chapter 7 bankruptcy -- learn more about the best interests of creditors test), and
• the plan must be fair and equitable (to satisfy this test, you must pay your secured creditors at least the value of their collateral, and you cannot pay creditors more than the amount of their allowed claims.

If the court believes that your plan satisfies all of these requirements, it will likely confirm your plan.

Chapter 11 bankruptcy can be a good option for debtors who want to reorganize their debt to keep their assets. A key part of any Chapter 11 case is the debtor's plan of reorganization. The plan of reorganization outlines how the debtor will pay back creditors over time. In order to move forward with the plan of reorganization, the creditors must accept it and the court must confirm it.

To explore more about the differences between Chapter 7 and Chapter 11, read Chapter 7 vs. Chapter 11 Bankruptcy.

Read Chapter 11 Bankruptcy: An Overview to learn more about Chapter 11 in general.