When management is new to Chapter 11, one of the most important things is to get a sense of what happens next and how it will all play out. Chapter 11 reorganizes debts so the company can continue as a going concern. Chapter 7 is different. In Chapter 7 debts are not reorganized, the company’s assets are sold off and the company goes away.
A reorganization plan is a formal description of how the debtor proposes to pay its debts in the future. A typical plan allows the debtor to get current over three to five years. There is a lot of complexity and most plans look a little different, but an early, well-conceived plan stands the best chance of working.
The Reorganization Plan
The reorganization plan is one of the most important ideas to master, and it will determine the business’s fate. Here is the who, what, when, where and why of a plan.
A plan is basically a court-approved agreement between the debtor and its creditors about how the debtor will repay them. Normally this starts out as a negotiating process between debtor and creditor. In standard cases there may be a creditors’ committee. If management and creditors can’t agree, the parties can resolve their differences through litigation or dispute resolution.
Sometimes the debtor alone proposes a plan, without creditors having a say in how it is drawn up. This is known as a cramdown plan. Another situation is where a debtor under Subchapter V of the Chapter 11 Bankruptcy Code is allowed to file a plan without creditor input.
It is important to remember that under Chapter 11 management is not simply walking away from debt; debts are reorganized and paid over time.
Under a plan management is no longer held to its current monthly payments. In effect the plan consolidates the various obligations and reworks how each party gets paid, satisfying creditors and keeping the business running. While every plan looks a bit different, there are basic elements each usually covers.
- Claims are put into classes with like claims in the same class. Creditors get certain rights depending on which class they are in.
- The plan lays out how the classes are to be paid.
- The plan may also state when a class of debts has been fully satisfied.
- It may also say which of the debtor’s assets are for sale, and which executory contracts the debtor will keep or discard.
- One option in a plan is to change the terms of payment, such as how much the debtor pays and over how long a time.
These are just some examples. Some plans are simple, and others are highly structured and sophisticated. Your own plan should be worked out with your lawyer to make sure it fits the goals you have for your company.
Why One Business Will File Before Another
The timing of a bankruptcy filing depends on your own circumstances. There are many strategic and legal reasons why one business will file before another. Company leaders and their counsel need to ask a lot of questions and do a deep dive into their business, both from a financial and legal standpoint, to find the right path forward.
Generally, Chapter 11 fits when you can’t pay the day-to-day bills, but with a little breathing room could get back to profitability. The business will still have to pay its bills, but will have time to restructure and regroup.
Wherever you file, bankruptcy cases are handled in federal (U.S.) courts, not state courts. Florida’s Southern District court has three locations: Miami, Fort Lauderdale and West Palm Beach.
The Basic Steps
One question you may be asking is, where does this start?
A bankruptcy begins with a court petition. But before that there’s some prep work to do. Debtors are wise to look into the details and ask questions before taking the plunge, but here are some of the basic steps:
- Gather the documents your petition will require.
- Choose the case type, a standard Chapter 11 or a Subchapter V small business case.
- Write up the petition and prepare the financial schedules needed to file.
- Draft a reorganization plan that defines how creditors are to be paid.
- Anticipate the problems that are likely to surface during the case and how to handle them.
Doing the research in advance helps decision-makers to be on top of the case from day one. Being ready makes it easier for management to make the hard decisions needed for the long term. Hiring an experienced bankruptcy lawyer is an important part of that preparation.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
