What happens during Chapter 11 plan confirmation and how can creditors protect their rights?

Under Chapter 11, companies file a petition to reorganize and continue operating as a going concern. Reorganization bankruptcy has several stages. Two of the final stages are plan confirmation and post-confirmation. During both of these stages, creditors must be on guard to protect their interests.

The Debtor Proposes a Reorganization Plan

The debtor alone can propose a plan for the first 120 days of the case, and the court can extend this. Think of the plan as a negotiated contract: it settles prepetition debts for secured creditors, unsecured creditors, contractual parties, and equity holders. If nearly all assets have been sold, it may be a liquidating plan. The plan classifies claimants into various categories of creditors. For example, the plan will likely have a category for unsecured creditors. The plan also explains how it will treat each category of creditor. After you receive a copy of the plan, compare the treatment of your claim to that of other creditors. For example, will the debtor satisfy your claim in full, or will you only receive a partial payout? You must carefully review both the plan and the accompanying disclosure statement. The disclosure statement is supposed to provide you with all of the information you need to vote intelligently. You will also find details on the debtor’s assets and liabilities, information on the organization of the debtor, how the plan classifies various creditors, how the plan will treat each category of creditor and voting procedures. The disclosure statement, along with the plan, is contained in the solicitation package. Read it closely, because there will be a deadline to file objections if you wish to do so, and it could be approaching.

Confirmation Hearing

Like you, other creditors will vote on whether to accept or reject the plan. At the confirmation hearing, the debtor brings the votes it has gathered from creditors entitled to vote on the plan, and asks the bankruptcy court to sign off on the plan. Even if you object to the plan, that does not mean the court will not confirm it. The court can confirm the plan over the objection of one or more creditors. Generally speaking, the plan must pay dissenting creditors at least what they would receive under Chapter 7 liquidation; must be ”fair and equitable”; may not ”unfairly discriminate” between classes of creditors; and must treat similar creditors alike. If you fall into a group of creditors whose plan classification will receive a particular payout, make sure that all creditors in that group are getting the same treatment. So take unsecured creditors for example. One general unsecured creditor should be treated the same as another. With that said, a secured creditor is paid before an unsecured creditor. The plan must be drafted with respect to these statutory priorities. It must otherwise follow the Bankruptcy Code. Reorganization plans can strip or change creditor rights - like provisions that prohibit setoff and recoupment, or those that grant third-party releases. The confirmed plan binds the debtor and every creditor alike, including those who opposed the plan.

Post-confirmation Carries Out the Plan

After the plan is confirmed, you must stay informed about post-confirmation proceedings. A plan confirmation is not the end of the bankruptcy process for creditors. Post-confirmation carries out the plan. This includes claims review and reconciliation, resolving objections to claims, distribution of assets to creditors and, sometimes, litigation of adversary suits. In a reorganization, the reorganized company runs itself. In liquidation cases, sometimes there’s a plan administrator or liquidating trustee to wind down assets. Post-confirmation isn’t a sprint to finish. It can drag on for months or years, depending on how complex the estate, claims and assets are. This is where your due diligence to keep monitoring the case pays off. The bottom line for creditors is to read the plan and disclosure statement carefully at confirmation, object to unfair terms by the deadline, vote and object to releases. After confirmation, respond fast to claim objections and demands.