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
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.