A debtor has the right to choose what kind of plan to submit in a Chapter 11 Bankruptcy. Upon filing, the debtor is given a period of 120 days, wherein he/she has the exclusive right to submit a plan for approval and confirmation. The expiration of this exclusive period does not mean that the debtor is precluded from submitting a plan; he or she can still file one, with the possibility of the creditors filing one of their own.
Although a Chapter 11 Bankruptcy is primarily considered to be a reorganization bankruptcy, the debtor is within his/her right to submit a liquidating plan. In a liquidating plan, the business as well as its assets are sold off to satisfy the debts and claims made on the estate. In a way, the submission of a liquidating plan is akin to Chapter 7 Bankruptcy, but with a few key differences.
In a liquidating plan, the debtor proposes to sell off the assets he/she is in possession of, either on a piecemeal basis or as a going concern. The proceeds of the sale will then go to the creditors to satisfy their claims; distribution will follow the priority scheme used in a Chapter 7 Bankruptcy case.
A liquidating plan is usually proposed by the creditors themselves in response to a lack of confidence in the debtor’s ability to make the business profitable. However, a liquidating plan can also be proposed by the debtor personally, especially when he/she believes it is the best course of action considering the circumstances.
Although the submission of a liquidating plan is akin to proceedings in a Chapter 7 Bankruptcy case, there are a few differences between the two.
Distinguished from Chapter 7
In a liquidating plan submitted under Chapter 11 Bankruptcy, the debtor in possession retains control of the business and its assets as they are sold. In fact, the debtor is allowed to continue operating the business pending the liquidation. This is a major difference from a Chapter 7 Bankruptcy case, where a trustee is appointed by the court to liquidate the assets of the debtor. Oftentimes in a Chapter 7 case, the debtor has little to no say in the liquidation of assets.
For a liquidating plan, the debtor in possession is responsible for carrying out the liquidation themselves. This means that the debtor can potentially seek out the highest price for the assets and maximize its value during liquidation. Compare this with Chapter 7 bankruptcy, where the trustee’s main concern is merely the quick disposition of assets and payment of creditors.
The debtor in possession has the option of selling the business as a going concern. This basically means that the debtor can sell the business as a whole, including potential goodwill attached to the business, rather than selling it on a piecemeal basis. Selling the business as a going concern could potentially yield a larger sum of money rather than if the business were sold on a piecemeal basis.
If the debtor can sell the business for the highest price, there is the possibility of the debtor retaining some equity. Thus, the debtor has an added incentive in maximizing the sale of the business. This is in contrast to Chapter 7 bankruptcy, where the trustee has little to no incentive in retaining equity.
Lastly, by choosing to submit a liquidating plan under Chapter 11 Bankruptcy, the debtor avoids paying a trustee’s administrative fees. Fees such as these could take a toll on the proceeds of the sale. In a Chapter 11 Bankruptcy case, the appointment of a case trustee is not mandatory; in fact, it is rarely done. In a Chapter 7 Bankruptcy, however, the appointment of a trustee is mandatory, as well as the payment of fees to that trustee.