What Do You Include in a Chapter 11 Reorganization Plan?

If your small business struggles to stay profitable, you may benefit from a reorganization. Chapter 11 bankruptcy is a way for your small businesses to restructure, repay creditors, and discharge certain debts to get a fresh start.

Chapter 11 bankruptcy can be expensive and time-consuming. It is essential to have experienced legal counsel to guide you through the process. Talk to an experienced bankruptcy lawyer in your state for legal advice about your business bankruptcy.

How Does Chapter 11 Bankruptcy Work?

Under the bankruptcy code, Chapter 11 bankruptcy is for businesses, corporations, limited liability companies (LLCs), and partnerships. Chapter 11 is a type of reorganization bankruptcy that allows small business owners like you to continue operating your business while it is restructured. You become the “debtor in possession” of your business.

Other bankruptcy options for business owners include Chapter 7 bankruptcy (liquidation). Chapter 11 is specifically for businesses. There are even special categories of Chapter 11 for small business debtors with a streamlined process and lower costs. These include the small business case and subchapter V filing. Chapter 13 bankruptcy is not an option for businesses.

What Is a Plan of Reorganization?

As the business owner, you must file a written disclosure statement and a plan of reorganization. The disclosure statement has to get a bankruptcy court’s approval before a vote on the reorganization plan.

The disclosure statement must provide information about the business’s liabilities, debts, income, and assets so secured creditors and unsecured creditors can make an informed judgment about whether your reorganization plan is doable. Creditors are generally interested in a Chapter 11 repayment plan because they may risk losing more if the business files Chapter 7 liquidation bankruptcy.

The reorganization plan must classify claims and specify how each class of claims will be handled under the plan. The class of creditors who will receive less than the full value of their claims (also known as impaired claims) can vote on the plan. The bankruptcy court will hold a confirmation hearing to confirm the reorganization plan.

What Does the Bankruptcy Trustee Do?

A U.S. trustee is appointed to oversee your company’s bankruptcy. They are responsible for monitoring your compliance with reporting requirements. They also monitor compensation reimbursement, plans and disclosure statements, and the creditors’ committees.

What Should Be Included in the Repayment Plan?

The U.S. Courts provide a form for Chapter 11 reorganization plans for small businesses. The reorganization plan proposes you pay creditors from business assets, including capital, loan proceeds, cash flow from operations, selling assets, and future income you expect the business to earn. Creditors are separated into classes, including:

• Priority claims
• Secured claims
• Non-priority unsecured claims
• Equity security interest holders

The plan should provide the restructuring steps your business is prepared to take to make the business profitable and provide a source of payment for creditors. Depending on the type of business, the description of reorganization may include reorganizing finances through a combination of:

• Increasing income: This can include raising prices on products or reducing expenditures elsewhere to increase your profit margins.
• Surrendering collateral to eliminate debt obligations: This can include getting rid of assets used to back loans, such as surrendering a business building or other property to foreclosure.
• Reduce expenditures: While difficult, this can include laying off employees, closing locations of your business, and other steps necessary to control your business’s spending.
• Sell debtor’s assets: Instead of surrendering assets, some businesses choose to sell off property that are less profitable, which can include physical assets, business information like client lists, or selling a division to a rival company.

The reorganization may also have “cramdown” provisions for a class of creditors who do not accept confirmation of the plan but will have to accept what the bankruptcy court approves. The cramdown provisions must be fair and equitable to those creditors.

What Happens if You Can’t Follow the Reorganization Plan?

Even with the best intentions and good faith efforts to restructure the business, financial difficulties may make it impossible for you to return the business to profitability.

If your small business cannot follow the repayment plan, the business or the court can convert your Chapter 11 bankruptcy case to a Chapter 7 liquidation plan. Under Chapter 7, the trustee will take over the business assets and liquidate the business to pay off debtors.

How Can a Bankruptcy Attorney Help?

Chapter 11 bankruptcy is generally more complicated than other types of bankruptcy filings. Before filing for a small business bankruptcy, consult with an experienced business bankruptcy attorney, who can help you understand your legal options under U.S. bankruptcy laws, including which type of bankruptcy to file or if there are alternatives to bankruptcy.

A Chapter 11 bankruptcy lawyer can help you review your company’s financial situation, evaluate assets and liabilities, and develop a reorganization plan to revive your business. They can help you avoid common mistakes that complicate the bankruptcy process.