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What exactly goes into a Chapter 11 reorganization plan?

This blog has discussed commercial bankruptcy in a number of recent posts on. In particular, in a post from two weeks ago, we highlighted how the automatic stay associated with Chapter 11 bankruptcy helped one business owner renegotiate some debts that he might not have been able to otherwise. Chapter 11 is often referred to as a reorganization bankruptcy, but our Wayne County readers may have some questions about what exactly this means for them. Following is some general information regarding that question, which should not be interpreted as specific legal advice.

It's important, first of all, to distinguish between Chapter 11 and Chapter 7, or liquidation bankruptcy. In Chapter 7, a business's assets are "liquidated," or sold off, in order to repay creditors. While the bankruptcy filing will wipe out its lingering debts, the business will no longer exist after the Chapter 7 filing.

Chapter 11, on the other hand, seeks to provide business owners with some temporary protection from creditors while they come up with a plan to become profitable again. This is useful, for example, when a business is still viable but is struggling financially in some area. Typically, one of the first steps in a business reorganization will be to review leases and contracts -- if these can be renegotiated in more favorable terms for the business, the reorganization plan may be off to a good start.

A reorganization plan will also have to address how existing debts will be handled. Some creditors will need to be given priority -- typically tax authorities, employees entitled to back wages and stockholders. Each of these will be given its own "class." Unsecured claims may all be placed into a single class. A plan for repayment must be proposed, and the creditors will vote whether or not to accept it.

If the creditors accept a business reorganization plan, and the court considers it to be a sensible, legally compliant and a good-faith effort to repay debts, the court will approve it and discharge what debts remain. Then it's just up to the business to stick to the repayment terms. Hopefully, with stronger financial footing, repayment will go quickly once operations resume and the company is able to turn a profit once again.

Source: Findlaw.com, "Chapter 11 Bankruptcy," accessed on Sept. 5, 2014

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