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.
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
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
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.
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.
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.
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
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.