What Unsecured Creditors Get in Chapter 11

In Chapter 11 bankruptcy, unsecured creditors are those who do not have a security interest or lien on the debtor's assets. Their treatment in the bankruptcy process is governed by specific rules and priorities outlined in the Bankruptcy Code.

General Principles

1. Priority Scheme: The Bankruptcy Code establishes a priority scheme for the distribution of assets in a Chapter 11 case. Secured claims are paid first, followed by priority unsecured claims (such as administrative expenses, wages, and certain taxes), and then general unsecured claims. 54
2. Absolute Priority Rule: For a Chapter 11 plan to be confirmed, it must adhere to the absolute priority rule. This rule requires that impaired classes of creditors, including general unsecured creditors, must either accept the plan or the plan must not discriminate unfairly and be fair and equitable with respect to each impaired class. Essentially, this means that general unsecured creditors must be paid in full before any lower-priority creditors or equity holders can receive any distribution. 5
3. Unsecured Creditors' Committees (UCCs): Unsecured creditors can participate in the bankruptcy process through an Unsecured Creditors' Committee (UCC), which is appointed by the U.S. Trustee. The UCC represents the interests of all unsecured creditors and plays a significant role in the case, including consulting with the debtor, investigating the debtor's financials, and helping formulate a Chapter 11 plan. 14

Recovery Rates

• Recovery Rates: The recovery rates for general unsecured claims in Chapter 11 cases can vary significantly. Data from FY 22 shows that the average recovery rate for general unsecured claims was around 60%, with a median of 90%. Approximately two-thirds of general unsecured claim classes received cash distributions. 6

Special Considerations for Solvent Debtors

• Post-Petition Interest: In cases where the debtor is solvent, unsecured creditors may be entitled to post-petition interest on their allowed claims. The interest rate can be a subject of dispute, with some courts favoring the contractual rate and others the federal post-judgment rate. 23

Key Points

• General Unsecured Claims: These are the lowest priority claims and often receive the least in a Chapter 11 bankruptcy.
• Absolute Priority Rule: Ensures that general unsecured creditors are paid in full before any lower-priority creditors or equity holders.
• UCC Participation: Unsecured creditors can influence the bankruptcy process through participation in a UCC.
• Recovery Rates: Varying recovery rates for general unsecured claims, with an average of 60% and a median of 90% in FY 22.
• Solvent Debtor Exception: Unsecured creditors may recover post-petition interest in solvent debtor cases, with the interest rate subject to judicial interpretation.