What is a Chapter 11 Reorganization Plan?

Most people are aware that businesses can declare bankruptcy just as individuals can. However, the details of this type of bankruptcy are less well-known. For example – do you know what a Chapter 11 reorganization plan is?

Here, we’ll help you understand this viable option for keeping your business and your livelihood afloat while dealing with debt:

First: What is a Chapter 11 Reorganization Plan?

When most people think of Chapter 11 bankruptcy, they think of the massive corporations whose bankruptcies make the news every month. These big businesses include giants like K-Mart and Sears and General Motors. However, there are over 14,000 cases of Chapter 11 bankruptcy each year, most of which never making headlines.

The point of a Chapter 11 reorganization plan is to allow a debt-laden business of any size to reorganize their debts while increasing the percentage of that debt that they can effectively repay to creditors. It is very similar to Chapter 13 bankruptcy for individuals in that it involves a restructuring of debt rather than a dismissal – and the point of it is to help make repayment more manageable. No matter how large or small your company is, if you are struggling with major debt, a Chapter 11 reorganization plan might be your best bet.

Getting Started with Chapter 11 Bankruptcy

How does Chapter 11 bankruptcy start? Since this type of bankruptcy is generally voluntary, it begins with the filing of a petition to an appropriate bankruptcy court. This typically involves filing in the home location of the business. However, businesses that are incorporated or otherwise “domiciled” in another area can file there.

In very rare cases, multiple creditors will work together to file an involuntary petition for Chapter 11 bankruptcy against a company that has defaulted on multiple, large debts. Likewise, in equally rare cases, an individual can file for this type of bankruptcy – but only if both their debt and their income exceeds the totals for both Chapter 7 and Chapter 13. Typically, though, Chapter 11 is reserved for corporations and businesses.

What Happens Next?

Some people believe that everything grinds to a halt once a bankruptcy is filed, but this isn’t the case. Especially when it comes to a business, everyday operations must continue. As long as the company can continue to function, it should do so to continue generating revenue, paying employees, etc. During this time, the debtor is referred to as the DIP – or debtor in possession.

In some cases, the bankruptcy court in charge of the case will appoint a trustee. This is a person or entity trusted with helping to manage the bankruptcy process. Some reasons for appointing a trustee during a Chapter 11 reorganization plan include:

• Incompetence on the part of management or ownership
• Dishonesty or fraud
• Gross mismanagement, and more

Generally, though, these cases proceed without the need for a trustee.

It is important to note that while a business is expected to continue routine operations during a Chapter 11 bankruptcy, control of those operations is handed over to the courts. This means that every move the business makes must be approved by the court, including:

• The creation or breaking of a rental property lease on behalf of the business
• The sale or purchase of property on behalf of the business
• Expansion of operations beyond the business at the time of filing
• Payments made, including legal and attorney fees associated with the bankruptcy itself
• The entering into of any type of agreements, such as vendor contracts, unionization, business licensing, and more
• The signing of a new mortgage, refinancing of a previous one, or any other arrangement that allows a business to borrow capital

Even shutting down regular business operations is subject to the approval of the courts. However, this is a last-case resort for companies that enter into a Chapter 11 reorganization plan and is not generally needed.

Creating a Workable Reorganization Plan

Once the bankruptcy is established, it is important to create a reorganization plan that will work for the company in debt. Typically, the debtor company is given four months from the time of filing to create this plan. However, this time may be extended to up to 18 months post-petition if reasonable cause is presented to the court.

After this period – if the debtor has made no appreciable progress – the creditors and the court may work together to create a reorganization plan. They may also create multiple plans, known as competing plans. However, the most likely instance involves the dismissal of the Chapter 11 case and the transferral of the case to a Chapter 7 bankruptcy.

To avoid this, it is important to come up with a plan that not only involves the appropriate repayment of debts, but which is realistically achievable for the company in debt. Several factors go into creating the best plan, including:

• Feasibility – Can the debtor actually manage the payments on schedule as planned?
• Best interest of all involved parties – Are creditors getting their fair compensation from this plan? It doesn’t work if it only benefits the business in debt.
• Fair and equitable – To meet this requirement, two things must happen. First, all secured creditors must be paid back an amount that is equal to at least the value of their collateral. (Secured creditors are those who hold a mortgage or lien against literal property or against business-related personal property, such as equipment. Secondly, the debtor must not retain anything from the equity they have at the time of filing unless all debts are paid in full or meet an otherwise agreed upon amount.

Lastly, all parts of the plan must be deemed as having been made in good faith. This means that they were done properly and without the use of any illegal or prohibited means.

If you’re looking for more information about creating a successful Chapter 11 reorganization plan, talk to the experts at VanHorn Law Group. We have the experience your business needs to navigate the process and create a plan that will get you to a better financial state, fast.