What Is a Plan of Reorganization in Chapter 11 Bankruptcy?

If you file for Chapter 11 bankruptcy, you must submit a plan of reorganization that outlines how you will repay creditors over time.

Chapter 11 bankruptcy can be a good option for debtors who want to reorganize their debt in order 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.

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 can continue to run your business. Over the course of the bankruptcy proceeding, you will be responsible for submitting various reports, fees, and documents.

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?

You have an exclusive right to file your plan of reorganization within 120 days from the date that you file your bankruptcy petition. If the court approves your request, you may be able to extend this time period for up to 18 months. 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 explain how the claims for each class of creditors will be treated. The classes of claims are usually categorized as:

  • secured creditors (they have debt backed by collateral)
  • priority unsecured creditors (their debt is not backed by any collateral and will be paid before those of nonpriority debt holders)
  • general unsecured creditors (their debt is not backed by any collateral and will be paid after priority unsecured creditors), and
  • equity security holders (they hold an equity security of the debtor such as a shareholder interest).

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."

In certain instances, the court will confirm a plan even if 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 ballots have been conducted, a hearing will be held to determine that the proposed modification does not negatively affect 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)
  • 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.

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