Understanding Bankruptcy Reorganization Plans
According to the Federal U.S. Bankruptcy Code, Chapter 11 bankruptcy is referred to as a type of bankruptcy that involves reorganization of an entity or consumer’s debts. This is in direct contrast to a liquidated bankruptcy, such as Chapter 7 bankruptcy, which requires a debtor to sell their assets for money to pay off their existing debts.
In general, a petition for Chapter 11 bankruptcy is typically filed by a corporation or partnership that is struggling to pay off their debts. While individual consumers and other persons in business may seek relief under Chapter 11 bankruptcy, it is not the standard.
Chapter 11 bankruptcy cases require the debtor to form a bankruptcy reorganization plan. The purpose of this plan is to give a business more time to reorganize their finances in a structured manner, so that they may pay off any debts still owed to creditors without having to either shut down their business or sell off large amounts of assets (e.g., equipment).
A debtor’s bankruptcy reorganization plan will then need to be approved by the bankruptcy court. The court will evaluate the plan and consider whether any debts must be paid off in full or in part, while other debts may be approved or included as part of the plan. Once the bankruptcy court approves a debtor’s Chapter 11 bankruptcy reorganization plan, the debtor must follow it accordingly. In addition, if a debtor seeks to modify any portions of their reorganization plan, those changes must also be approved by the bankruptcy court.
Bankruptcy Reorganization Plan
It is very important that a Chapter 11 bankruptcy reorganization plan be written in clear terms and with unambiguous instructions. As such, a debtor may want to consider hiring a bankruptcy lawyer to draft and review the final version of their plan before submitting it to the bankruptcy court for approval.
Some common issues that a bankruptcy reorganization plan should address in advance may include:
• Identifying the types of debt as well as the amount of each debt that still needs to be paid;
• Identifying the names and types of creditors associated with each identified debt (e.g., secured creditors, unsecured creditors, etc.);
• Determining whether the identified debts need to be paid in full or in part (note that this is often left up to the bankruptcy court’s discretion);
• Citing the methods being used to pay off each of the various debts (e.g., whether debts will be paid off using a company’s future earnings or if the company may need to sell off some business assets for funds to satisfy remaining debts);
• Providing instructions on how an indebted business organization will proceed or operate in light of their newly restructured debts; and
• Determining whether a special committee will be formed to manage and execute the bankruptcy reorganization plan.
It should be noted that each bankruptcy reorganization plan will likely be tailored to the needs of an individual business. Thus, such plans will often vary by business and in accordance with the nature of a particular business’s debts. For instance, a business may need to create a bankruptcy reorganization plan that involves paying off multiple, non-dischargeable debts. In such a scenario, the plan will be centered on how all of those debts will be repaid by the business.
Other plans may focus on distributions of a business’s assets instead. However, this type of plan will act more like a liquidation bankruptcy than a reorganizational one and will require a business to sell off assets for cash. A plan can help a business to keep track of which assets they intend to sell to pay down their debts.
As is evident from the above information, a plan may contain instructions for a wide variety of issues that need to be addressed in order to fully pay off an organization’s debts. This is why those filing for Chapter 11 bankruptcy should work with a bankruptcy lawyer when drafting a bankruptcy reorganization plan. A lawyer can help ensure that it is not only legally valid and enforceable, but also that it covers all scenarios related to a business’s debts and obligations.
What If a Bankruptcy Reorganization Plan Is Violated?
As previously discussed, a Chapter 11 bankruptcy reorganization plan must first be approved by a bankruptcy court before it goes into effect and becomes legally enforceable. In other words, a bankruptcy court will not permit an organization to declare Chapter 11 bankruptcy without having a valid bankruptcy reorganization plan in place. Once the bankruptcy court approves this plan, it is considered to be legally enforceable in the eyes of the law. As such, a violation of a Chapter 11 bankruptcy reorganization plan can lead to serious legal consequences.
For instance, if the indebted business organization does not follow the guidelines laid out in their reorganization plan, such as paying off portions of debt by a certain date, then a creditor may be allowed to place a levy on the indebted business organization’s property and/or assets. This may include items, such as inventory, equipment, and bank accounts associated with that business.
If the indebted business organization fails to comply with the terms of the lien as well, then the creditor who placed the lien on the business’s property will be legally permitted to seize those assets. This may be done in order to satisfy the remaining balance of debt still owed to them by the business. This could result in the debtor losing their company, which is what they were trying to avoid when they initially filed a petition for Chapter 11 bankruptcy.
Some other consequences may include a dismissal of their Chapter 11 case, being ordered to immediately pay off all leftover debts in full, and potential penalties. If a debtor is simply unable to fulfill some condition of their plan, they should discuss the issue with an attorney who will be able to advise them on whether they will be able to amend or modify the plan.
On the other hand, it is also possible for a creditor to violate an indebted business organization’s Chapter 11 bankruptcy reorganization plan. For example, if a creditor tries to collect more money than the amount that was originally agreed upon during the creation of a specific bankruptcy reorganization plan, the business can use this plan as proof to avoid having to pay the inflated amount that the creditor is now demanding. Thus, it is in the best interest of both a creditor and an indebted business organization to cooperate and come up with a bankruptcy reorganization plan that suits both parties. This can help prevent more money, time, and other resources from being spent in the future due to a legal dispute.
Lastly, in order to ensure compliance and that both parties understand their legal obligations under such a plan, each party should retain their own separate bankruptcy attorney to help them negotiate for favorable terms as well as to assist them with drafting the plan and submitting it to the appropriate bankruptcy court for final approval.
The Four Reorganization Bankruptcy Chapters
Debtors choose to reorganize under either Chapter 9, 11, 12, or 13, depending on the particular circumstances. An overview of each appears according to filing frequency.
Chapter 13: Individuals and Couples
This chapter allows single and married people (but not businesses, other than sole proprietors) to pay discretionary income (the amount remaining after paying living expenses) into a plan for three to five years. If your family income is above the average for your state (called the median income), your plan will be 60 months long. When income falls below the median, 36 payments are required, but you can propose a plan that spreads out what you need to pay over 60 months, if necessary.
How Debts Get Paid During the Plan Period
Bankruptcy law assigns a higher priority to some debts and requires the filer to pay them fully over the course of a three- to five-year plan. Examples of priority claims include the following:
• recent income tax debts
• past due child support and alimony payments, and
• overdue payments on secured debts like house notes (you don’t have to pay off the entire mortgage within the plan, however).
Most of your other debts—like credit cards and medical bills will fall into the category of general unsecured debts and won’t necessarily be paid anything. They’ll receive something only if you have disposable income after all your higher priority claims get paid. Even then, the unsecured claims might be paid pennies on the dollar. The remaining debt gets discharged at the end of the case.
Using the Plan to Make a Secured Debt More Affordable
Another interesting feature of a Chapter 13 plan is its ability to cram down (reduce) a secured debt (other than the mortgage on your residence or a recently purchased vehicle). If the collateral (the property securing the debt) is worth less than what you owe, you can propose to pay just the value of the asset plus interest at one or two points above prime. For high-interest loans that are under water, this can save you thousands of dollars. Unfortunately, not all secured loans are subject to cram down. It’s not available for the mortgage on your residence or on car loans that are less than two and one-half years old when you file your case. Also, you must be able to pay off the entire cram down amount over the course of the plan, something many people aren’t able to do for high-value property, such as vacation rentals. Although you can’t cram down your home mortgage, you can use a Chapter 13 plan to strip off a junior mortgage if your property value has dropped so far that it’s no longer enough to cover your primary mortgage. (This was commonly used during the housing crisis; however, its availability is limited due to rising property values.)
Chapter 11: Businesses and Individuals
Chapter 11 bankruptcy is best known for helping prevent large corporations from closing their doors. Because of the expense involved in filing a Chapter 11 case, it’s used by small businesses to a lesser extent, and, on a rare occasion, by individuals whose debt balances exceed the Chapter 13 debt limitations. In many Chapter 11 cases, creditors actively work with the debtor to evaluate the debtor’s financial health and determine the best way to tackle the debtor’s debt. This collaboration will include more than renegotiating loan terms, although that accounts for an important part of the plan.
During the first months of a Chapter 11 case, the parties look carefully at many aspects of the business. Decisions might be made to do one or more of the following:
• change leadership
• sell underperforming assets, or
• reorganize operations to make them more efficient.
The debtor then proposes a plan for paying its debts. A Chapter 11 plan must be approved not only by the bankruptcy court but by the creditors owed the most money. If a debtor fails to propose a confirmable plan, a creditor (or the trustee, if one has been appointed), can offer a plan that will be submitted to the creditor body for a vote. Once a plan is confirmed, the debtor can spend years carrying out its terms.
Chapter 12: Farms and Fishing Operations
If your primary business is farming or fishing, you’ll likely choose to file for Chapter 12 bankruptcy. The procedural aspects of Chapter 12 and Chapter 13 cases are similar; however, Chapter 12 bankruptcy provides more flexibility because it allows for the seasonal nature of the farming and fishing industries. The Chapter 12 debtor has 90 days after filing the case to propose a plan lasting from three to five years. Instead of making monthly payments as required by Chapter 13 bankruptcy, the Chapter 12 plan can allow for seasonal payments. The plan can also provide for a cram down of virtually any secured debt, including homes and farmland, and allow for the modified secured debt payments to extend beyond the five-year plan limit.
Chapter 9: Municipalities
Chapter 9 bankruptcy is reserved exclusively for municipalities and governmental units like utilities and taxing districts. The plan and the plan approval process in Chapter 9 bankruptcy are similar to Chapter 11 bankruptcy.
Creditors in Chapter 9 are not allowed to propose a plan, but taxpayers and creditors can file a plan objection.
Do I Need a Lawyer for Assistance With a Bankruptcy Reorganization Plan?
Given the complexity of the laws and procedures required when filing for Chapter 11 bankruptcy, it may be in a debtor’s interest to consult a local bankruptcy lawyer in Utah preferably Ascent Law Firm for further legal advice.
An experienced bankruptcy lawyer will be able to draft, edit, and review a Chapter 11 bankruptcy reorganization plan to ensure that it is legally valid and enforceable.
Your lawyer can also make sure that you understand your rights and legal obligations under your Chapter 11 bankruptcy reorganization plan and other laws. Having your lawyer review your plan can also help to prevent legal disputes from arising over the plan in the future.
In addition, hiring Ascent Law Firm lawyer may make it more likely that the bankruptcy court will approve the first plan without any need for changes since your bankruptcy lawyer will already be familiar with the types of provisions to incorporate in the plan. Finally, should you encounter any legal issues that require you to appear before a bankruptcy court, your lawyer will be able to provide legal representation and defend your interests as well.
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