Chapter 11 Plan of Reorganization Overview

A Bankruptcy Chapter 11 Plan of Reorganization must meet certain standards before it can be approved by the court.  Some of the required elements that must be included in a Chapter 11 plan of reorganization are:

  • A clear designation of the classes of creditors’ claims that will be affected by the plan (a plan proponent (the party who proposes the plan) can only classify claims together if they are “substantially similar” (§ 1122);
  • An overview of the unimpaired and impaired classes of creditors (“Impaired” classes get to vote on the plan. Essentially, if a plan alters the rights of a party in any way (negatively or positively), that party is considered impaired and is allowed to vote. (§ 1124));
  • An explanation of how impaired creditors will be treated; and
  • An adequate, viable means for implementation of the plan.

Section 1123(a) of the Bankruptcy Code specifies what a plan must include. This section should be used as a checklist to confirm that a Chapter 11 Plan of Reorganization contains everything it should. Specifically, section 1123(a) provides that a plan must:

  • designate classes of claims and classes of interests;
  • specify any class that is not impaired under the plan;
  • specify the treatment of any class that is impaired under the plan;
  • provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment;
  • provide adequate means for the plan’s implementation, such as—
    • retention by the debtor of all or any part of the property of the estate;
    • transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan;
    • merger or consolidation of the debtor with one or more persons;
    • sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the estate;
    • satisfaction or modification of any lien;
    • cancellation or modification of any indenture or similar instrument;
    • curing or waiving of any default;
    • extension of a maturity date or a change in an interest rate or other term of outstanding securities;
    • amendment of the debtor’s charter; or
    • issuance of securities for cash, for property, for existing securities, or in exchange for claims or interests, or for any other appropriate purpose;
  • provide for the inclusion of certain provisions regarding voting in the charter of the debtor if it is a corporation; and
  • contain only provisions that are consistent with the interests of creditors and equity security holders and with public policy with respect to the manner of selection of any officer, director, or trustee under the plan and any successor to such officer, director, or trustee

Section 1123(b) of the Bankruptcy Code provides that a plan may:

  • impair or leave unimpaired any class of claims, secured or unsecured, or of interests;
  • provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected;
  • provide for—
    • the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or
    • the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest;
  • provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests;
  • modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and
  • include any other appropriate provision not inconsistent with the applicable provisions of this title.
  • Disclosure Statement

Before a debtor can solicit votes from creditors on a Chapter 11 Plan of Reorganization, the debtor must file a Disclosure Statement and have it approved by the bankruptcy court after a hearing.  The Disclosure Statement is a lengthy document, similar to an SEC registration statement, and must contain information sufficient for the holders of claims and equity interests to make an informed judgment about the plan and how they would vote on it.  Once the Disclosure Statement is approved, the debtor can then solicit votes on the plan through the balloting process.

  • Voting on the Plan

All impaired classes are entitled to vote on the plan of reorganization.  In order for a plan to be confirmed, an affirmative vote of at least two-thirds in dollar amount of claims and more than one-half in number of the creditors in a class that submit votes is required for the acceptance of the plan of reorganization by that class.  For equity interest holders, the affirmative vote of holders holding at least two-thirds in amount of the equity interests in a class is required from the class voting on the plan of reorganization.  Classes of claims and equity interests that will not receive any distribution under the plan of reorganization are deemed to have rejected the plan of reorganization and, therefore, do not vote.

  • Confirmation of the Plan

All impaired classes are entitled to vote on the plan of reorganization.  In order for a plan to be confirmed, an affirmative vote of at least two-thirds in dollar amount of claims and more than one-half in number of the creditors in a class that submit votes is required for the acceptance of the plan of reorganization by that class.  For equity interest holders, the affirmative vote of holders holding at least two-thirds in amount of the equity interests in a class is required from the class voting on the plan of reorganization.  Classes of claims and equity interests that will not receive any distribution under the plan of reorganization are deemed to have rejected the plan of reorganization and, therefore, do not vote.Upon completion of the voting process, the plan of reorganization is submitted to the bankruptcy court for review and confirmation, and the Confirmation Hearing will be held.  The bankruptcy court must be satisfied that the plan is feasible prior to confirming it.  In determining the plan’s feasibility, the bankruptcy court will analyze whether the debtor will be able to meet all of its obligations under the plan. Once the bankruptcy court approves the plan and enters the Confirmation Order, all interests (including the interests of those creditors or equity interest holders that voted against the plan of reorganization) are bound by its terms and all debts of the debtor that arose before the date of confirmation are discharged, provided that the debtor continues to engage in business.

To learn more about assistance with Chapter 11 Bankruptcy proceedings, contact Virtual Paralegal Services.

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