What Chapter 11 Means for Creditors
Chapter 11 bankruptcy is a form of bankruptcy that allows debtors, typically businesses, to reorganize their debts and continue operating while repaying creditors over time. Here's what Chapter 11 means for creditors:
Automatic Stay
- Immediate Protection for Debtors: The filing of a Chapter 11 petition automatically stays all creditor actions against the debtor, including foreclosures, collection actions, civil litigation, and other creditor actions. 14
- Breathing Room: This automatic stay gives the debtor a moratorium on the payment of many debts, providing time to propose a reorganization plan. 13
Reorganization Plan
- Central Feature: The reorganization plan is the core of Chapter 11 bankruptcy. It outlines how the debtor will repay creditors and may include downsizing operations, renegotiating debts, or liquidating assets. 26
- Best Interests of Creditors: The plan must be in the best interest of creditors, meaning they must receive at least as much as they would under a liquidation (Chapter 7 bankruptcy). 26
- Voting: Creditors vote on the plan, and it must be accepted by a majority of creditors (and account for at least two-thirds of the debts owed) to be confirmed by the court. 36
Debtor-in-Possession
- Control and Responsibilities: The debtor-in-possession (DIP) retains control over its assets and business operations but must comply with Chapter 11 requirements and court orders. 24
- Fiduciary Duties: The DIP acts as a fiduciary, with duties similar to those of a trustee, including accounting for property, examining and objecting to claims, and filing informational reports. 45
Creditors' Committee
- Representation: A creditors' committee, appointed by the U.S. Trustee, represents the interests of unsecured creditors and plays a significant role in the Chapter 11 case. 45
- Negotiation: The committee negotiates with the DIP on the reorganization plan and may hire professionals to represent their interests. 45
Secured Creditors
- Adequate Protection: Secured creditors are entitled to adequate protection of their collateral, ensuring that the value of their security interest is preserved. 5
- Proof of Claim: Secured creditors should file a proof of claim to ensure their interests are recognized and protected. 5
Advantages for Creditors
- Potential for Higher Recovery: Chapter 11 can offer creditors a higher recovery than liquidation, as the debtor continues to operate and generate cash flow to repay debts. 67
- Structured Repayment: The reorganization plan provides a structured repayment schedule, which can be more predictable and beneficial for creditors than immediate liquidation. 67