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Published Articles by David Balovich

Title:  Chapter 11 Confirmation
Published in: Creditworthy News
Date: 4/24/02

One hundred twenty days (120) after the filing of the petition, the debtor in possession must file a plan for the reorganization of the business. The plan must be proposed in good faith and not violate any applicable laws. If the creditors approve the plan, it must also be confirmed by the Bankruptcy Court.  If the plan is carried out successfully, the debtor is discharged from debts that arose before the confirmation of the plan and the business may continue to operate.

A debtor’s plan of reorganization is a court approved written contract between the debtor and its creditors. Under the plan, the debtor takes on obligations to pay and do certain things, and in return receives back the business free of all old debt.  This doesn’t mean creditors must be paid in full. It does mean the plan must be practical, and the creditors must do at least as well under the reorganization as they would do in Chapter 7 liquidation.

In order for a plan to be confirmed thirteen requirements must be met, however, only six of those requirements are considered formidable.

To be confirmed, a plan must be for the best interests of the creditors. That means simply that creditors must be paid at least as much under the plan as they would receive if the debtor’s property were liquidated in a Chapter 7, and the proceeds were distributed pro rata.

To be confirmed, a plan must be feasible. Although this sounds simple, it’s not. The debtor has to have a plan as to how he will generate the money necessary to pay creditors. If the plan is to generate the money from future operating profits then the plan must project future earnings based on past profitability. That is why, in a typical Chapter 11, it takes several months of internal reorganization and demonstrated profitability before a realistic plan can be proposed. Future profits can only be projected if you are presently operating profitability.

To be confirmed, administrative claims must be paid at the time the plan is confirmed and before unsecured creditors are paid anything. Administrative claims include not only the debtor’s attorney fees but also those of the Official Creditors’ Committee, and often counsel for secured creditors and landlords. They also include the fees of accountants, consultants and any operating expenses that remain unpaid.

To be confirmed, all local, state and federal taxes must be paid within six years after the date the tax was accessed. This includes interest that may be charged on all deferred payments.

To be confirmed, the debtor must produce a disclosure statement. This is the document that is supplied to the creditors to vote whether to accept or reject the plan. Before going to the creditors it must be approved first by the bankruptcy judge. The document will only be approved if it is found to contain adequate information including company history, projections and detailed information of the effect of the plan on every class of creditor. It must explain why the plan is better then liquidation, and how the debtor will make payments under the plan.

Finally, a Chapter 11 plan can be confirmed only if it has been accepted by every impaired class of creditor. A class of creditor accepts the plan if over half the creditors in number and at least two-thirds in amount, who vote, vote to accept. Actually, a Chapter 11 plan can be confirmed over the rejection by a class (crammed down) if two simple tests are satisfied. The plan cannot discriminate unfairly, and it must be fair and equitable.

Of all the confirmation requirements, “best interests” and “feasibility” are the most important. They create the one question each creditor who votes on the plan must ask: Is it a good deal or a bad deal for me, compared to the alternative?

Creditors can and often do agree to accept less than 100 cents on the dollar and to permit the owners to keep the business.

I wish you well.

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