In Chapter 11 Bankruptcy, the most important document is the reorganization plan. In fact, a Chapter 11 Bankruptcy is more commonly known as a reorganization bankruptcy. A reorganization plan details how the debtor in possession intends to repay the creditors and make the business profitable again.
There are many kinds of plans available to a debtor in possession, but these plans all share common characteristics. Usually, a debtor’s reorganization plan will seek to preserve the business while at the same time satisfying the demands of the creditors.
Who is the debtor in possession?
In a Chapter 11 Bankruptcy proceeding, the debtor is allowed to remain in possession of the assets of the business, even though these assets have been used as security for debts. Likewise, the debtor is also allowed to conduct the affairs of the business and the term debtor in possession stems from this. A debtor remains to be a debtor in possession for the pendency of the case unless the case is converted, or if a case trustee is appointed.
A common feature of a debtor in possession plan is that they usually involve reorganization rather than liquidation. In a reorganization, the business maintains operations, although assets may be sold off. The debtor comes up with options to pay for claims while making the business profitable at the same time. Liquidation, on the other hand, often involves the closure of the business and cessation of operations.
Strategies for Reorganization
The debtor can achieve reorganization in several ways. A common chapter 11 reorganization strategy is to propose cutting operating costs. Assets may also be sold off, especially those who are not earning or are less profitable. When it comes to creditors, the debtor may opt to stretch out the debts of secured creditors. For unsecured creditors, the debtor may choose to only a fraction of their claims.
The term ‘stretch-out’ in this case means that the debtor will extend the period of payment for secured debts. A reduction of interest for the early years is often sought. When the debtor chooses to avail of this option, they must secure the permission of the creditor. The secured creditor normally cannot foreclose on the property of the debtor during the pendency of the bankruptcy. An exception to this is when the creditor seeks the court’s permission to be exempted from the stay; this often happens when the property used as security is not necessary to the reorganization plan.
It’s not uncommon for unsecured claims to be paid less than their value. The amount is also paid over a period of time rather than a one-time payment. The debtor may choose to pay the unsecured creditors only a portion of their claims over a period of years. The debtor may also offer the unsecured creditors the option of being paid a part of the business profits over a period of years. Lastly, if there are unliquidated claims (meaning claims which cannot be accurately calculated), the debtor has the option of setting up what is termed a ‘pot of money’ to ensure their payment.
Sale of Assets
The sale of assets may be necessary for a reorganization plan. When the plan involves a sale of assets, the debtor is given a period of time (usually 1 to 2 years) in which they can market and sell the property. The debtor is given as many opportunities as available to make a profitable sale. Auction is only used as a last resort. The same rule applies if the asset involved is not property, but rather business; piecemeal sale of the business is only used as a last resort.
The creditors are also allowed to submit a plan upon the expiry of the exclusive period given to the debtor. Creditor’s plans are often less favorable to the debtor. These often involve auction sales of property and usually provide for liquidation rather than reorganization.