The central part of a Chapter 11 bankruptcy is the design, approval, and administration of a reorganization plan. A Chapter 11 plan starts by dividing the creditors into various classifications including priority creditors, administrative creditors, secured creditors, and unsecured creditors. The plan proposes how much money each of these creditor classes are going to be paid, how the debt is restructured, and the terms of the payments. Usually a plan lasts about five years, but with court approval the term could be extended for up to ten years in certain situations. Chapter 11 plans must provide that the superior class of creditors (such as administrative creditors or priority creditors) are paid in full before payments are made to the junior classes.
Chapter 11 plans may cram down part of a creditor’s claim. That typically occurs when claims are bifurcated into secured and unsecured portions. If the current value of property securing a claim is less than the amount of the debt, the court may split the claim into two parts – one being a secured claim to the extent of the property value and the other being an unsecured claim for the balance of the debt. Chapter 11 plans have requirements similar to Chapter 13 plans in that the debtor must show that all of the business’s disposable income is going into the plan and that all creditors within a class are being treated fairly.
When a plan is ready for submission to the court, the Chapter 11 debtor files the plan and a financial disclosure statement, both of which are served on all creditors. The plan is subject to approval by the creditors, each of whom is entitled to vote for approval or rejection. The court often approves a Chapter 11 plan over the objection of one or more creditors or creditor classes.
Chapter 11 Bankruptcy Trustee
The role of the trustee is different in each of the bankruptcy chapters. In Chapter 7 cases, there is a panel of individual trustees each of which are assigned a number of Chapter 7 cases. They liquidate the non-exempt assets and pay the creditors. There is a single trustee that evaluates debtor’s plans and administers payments for all Chapter 13 debtors. Chapter 11 bankruptcy is administered by the Office of the United States Trustee. Various people in the US Trustee’s office act together to oversee the entire Chapter 11 process. Immediately after a Chapter 11 is filed, there is an initial interview of the Chapter 11 debtor’s representative during which the debtor produces historical and prospective financial data. In order to anticipate revenues and expenses for the first six-month period after the Chapter 11 is filed, the Trustee’s office accountants review the debtor’s economic data and pose their questions to the debtor’s representatives.
Chapter 11 bankruptcy, like Chapter 13 bankruptcy, involve a repayment plan. In Chapter 13, the plan is evaluated and approved or rejected by the Chapter 13 trustee. Chapter 11 is different in that the trustee may offer an opinion as to the debtor’s plan, but the plan is subsequently reviewed by the court after receiving comments from the various creditors. The US Trustee is less directly involved than a Chapter 13 trustee in plan approval. In Chapter 11, the role of the US Trustee’s office is to primarily oversee the bankruptcy and to offer opinions to the court which the court can either accept or reject.
In Chapter 13, the trustee requires a debtor’s plan to conform with the trustee’s standard requirements. If a Chapter 13 debtor’s plan is approved by the trustee, it will for all practical purposes be confirmed. In Chapter 11, the US Trustee’s office is acting as a watchdog for the creditors and takes a more adversarial role on behalf of the creditors than does the Chapter 13 trustee in an individual reorganization.