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Understanding Your Plan of Reorganization for a Chapter 11 Bankruptcy

Posted By Allmand Law Firm, PLLC || 16-Jun-2014

Chapter 11 bankruptcy, also known as "reorganization bankruptcy," is a bankruptcy plan that allows corporations, partnerships and individuals to reorganize their finances and restructure their debt. Unlike Chapter 13 bankruptcy cases, Chapter 11 bankruptcy has no debt ceiling. This plan is popular with both large and small businesses that need to restructure their debt.

The reorganization plan is an important part of a Chapter 11 filing. Generally, a business that is filing for Chapter 11 bankruptcy does not have a restructuring plan in place and continues to operate as a debtor until a plan is drafted. Once the company has outlined their restructuring plan, the plan is presented to the court where it will undergo an analysis before approval. The bankruptcy court may require that some creditors be paid in full, while allowing for a partial repayment on other debts.

What Should the Plan of Reorganization Include?

A Chapter 11 bankruptcy plan should be well-organized and straightforward. If possible, the reorganization plan should be drafted by a lawyer or someone with experience in bankruptcy laws.

The following issues should be outlined in the reorganization plan:

  • Identification of each debt and to whom it is owed
  • A determination of which debts will be paid in full, and which debts will be repaid in a percentage amount
  • Methods regarding how the debts will be paid, whether through the sale of assets, or from future profits, etc.
  • Guidelines as to how the company will continue to operate while implementing the new plan
  • Whether the execution and oversight of the reorganization plan will be carried out by a designated committee

What Happens If the Reorganization Plan is Violated?

Until a business has a valid reorganization plan, they will not be allowed by the courts to declare a Chapter 11 bankruptcy. However, once the reorganization plan is drafted and approved by the bankruptcy court, it is effective and legally binding. Violations of the reorganization plan, whether by the debtor or the creditor, can lead to a variety of legal repercussions.

When the Debtor Violates

If a debtor violates the terms of the reorganization plan by not paying the debts as agreed upon, the creditor may be permitted to secure a lien on the business property or assets in order to satisfy the debt payments.

When the Creditor Violates

The creditor is also bound by the terms outlined in the reorganization plan. If a creditor attempts to collect more than the what is required by the agreement, the debtor can reference the bankruptcy reorganization plan. The creditor is only entitled to the payment agreed upon, even if the debt is to be paid in a percentage amount.

By the proper negotiation between the creditor and debtor parties during the drafting of the reorganization plan, many lawsuits and legal disputes can be avoided.

Where Can I Find Help With My Plan of Reorganization?

To avoid errors and misunderstandings that can slow the process of declaring Chapter 11 bankruptcy and result in legal disputes, a bankruptcy lawyer should draft and review the bankruptcy reorganization plan. Because the plan will need to pass several analyses by the bankruptcy court, it is essential that a lawyer first review the plan to ensure its approval. In addition to this, a lawyer can also represent the debtor in court if a lawsuit should arise over the terms of the reorganization plan.
Categories: Chapter 11 Bankruptcy
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