Reorganization is the central goal of Chapter 11 bankruptcy. In this article, we’ll define the term “reorganization” and explain how it plays out in Chapter 11 bankruptcy.
A reorganization is the process of overhauling a business in order to restore its profitability. This is the focus of the Chapter 11 bankruptcy process, which allows individuals or businesses that cannot pay their debts to restructure their debts and reorganize their business with the goal of becoming profitable again. During the reorganization process, the debtor is temporarily protected from claims by creditors for repayment of outstanding debts by an automatic stay.
Because Chapter 11 reorganization can be expensive, it is most commonly used by large corporations and high net worth individuals and rarely by small businesses. The debtor’s goal is to retain as many of their assets as possible even through the bankruptcy process.
When somebody files for Chapter 11 bankruptcy, the bankruptcy court will supervise their process of reorganization. The debtor must submit a reorganization plan to the court. If the court approves the plan, the business can continue to operate and the debtor’s dischargeable debts are erased. They must then proceed to act in accordance with the terms set forth by the plan.
If the plan is rejected, the company must liquidate all of its assets to pay off its creditors.
The plan of reorganization is one of the most important documents in a Chapter 11 bankruptcy case. Debtors must file their plan of reorganization within 120 days of filing for bankruptcy. It is also possible to petition for special approval to extend the deadline for up to 18 months. Once this period of time is over, the debtor’s creditors and/or the bankruptcy trustee have the right to submit their own plan. The terms in this competing plan may be less favorable to the debtor.
In order to be approved by the bankruptcy court, a reorganization plan must include drastic steps to reduce costs and increase revenue. Drastic changes might include:
Plans of reorganization must include the following elements.
Once the debtor submits their plan of reorganization, all impaired creditors (or creditors who will receive less than the full value of their submitted claim) will be allowed to vote on it by ballot. At least one class of impaired creditors must accept the plan before it is given to the court for confirmation.
It is possible for the court to confirm a plan of reorganization even if an impaired class of unsecured creditors has voted against it in a process called a cramdown. This will happen only if the plan is fair and equitable with respect to each class of impaired creditors.