Bankruptcy Reorganization Plans

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 What Are 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. 

What Are Some Issues to Address in a 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. 

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 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 as well as the federal U.S. Bankruptcy Code 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 a 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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