Chapter 11 bankruptcy, also known as reorganization bankruptcy, is exclusive for corporations, partnerships and individuals to work on their reorganization strategy in the midst of financial struggles. They work on reorganizing their finances and restructuring of their debts. Since this bankruptcy has no debt ceiling (different from Chapter 13 bankruptcy), it is much preferred by small and large businesses for the restructuring of their open debts.
The crux of Chapter 11 bankruptcy is the reorganization plan. Till a restructuring plan is drafted by a company and submitted in court, every company will be treated as one that operates as a debtor. The presented plan is analyzed and detailed in the court prior to its approval. As part of the plan, some of the creditors may be expected to be repaid in full while some of the debts are expected to be at least paid us partially.
The Reorganization Plan
The main component of Chapter 11 bankruptcy is the reorganization plan. Its features are quite important too
- A straightforward and well-organized plan is needed in Chapter 11 bankruptcy
- It should be drafted by a lawyer or any experienced professional knowing bankruptcy laws – since the process is complex and the entirety of reframing the future financially depends on this plan
- The plan should contain information about each debt (uniquely identified) and to whom it is owed
- The plan should carry the information about which of the debts can be repaid in full and the facts about the partial amount percentage
- The strategy about the payment of the debts, whether it will be done using the sale of assets, or from the profits that will be obtained, has to be detailed in the plan
- The organization should mention about the guidelines for the company to operate while the reorganization plan is getting implemented
- The designated committee information who will oversee the organization plan execution should also be mentioned in the plan
Important scenarios to consider
If the plan is violated – A violation of an approved plan can lead to a lot of legal actions – this is applicable even if the debtor or creditor violates the plan. An approved plan is legally binding and effective from the time it is approved by the bankruptcy court. Until there is a reorganization plan by the organization, they will not be able to file for a Chapter 11 bankruptcy.
If the debtor violates – If the agreed upon debts or payments are not paid by the debtor, the associated creditor can secure a lien on any of the properties or assets to meet the debt payments
If the creditor violates –There are clauses that bind the creditors in a reorganization plan and hence if any creditor attempts to violate those, legal actions can be enforced. Let’s say the creditor attempts to collect more than what is entitled to him as per the reorganization plan, then the debtor can reference the plan.
In most cases, many legal disputes can be properly negotiated between the creditor and debtor parties.
For all needed help in the drafting of a reorganization plan, and for the necessary processes in filing a Chapter 11 bankruptcy, reach out to experienced attorneys in renowned law firms such as Recovery Law Group.