- Chapter 7 – Liquidation
- Chapter 9 – Municipality Bankrutcy
- Chapter 11 – Business Reorganization
- Chapter 11 – Creditors’ Rights
Chapter 11 bankruptcy is for businesses that have experienced some financial trouble and are seeking to reorganize large amounts of debt and pay it off over the period of time. In Chapter 11 bankruptcy, creditors have rights and are involved in the process of establishing a satisfactory payment plan.
What are creditors’ basic rights in a Chapter 11 bankruptcy proceeding?
Creditors have the rights to be paid from the revenues of the bankruptcy estate. Creditors have a rights to be heard by a trustee during court meetings. Creditors have a right to challenge the debtor’s plan and even file a competing reorganization plan to ensure that they are adequately paid. Creditors should keep in mind that they need to follow certain procedural prerequisites to preserve their rights in Chapter 11 bankruptcy proceedings.
What are the rights of investors of the publicly traded company that is going to file for a Chapter 11 bankruptcy?
If a company you’ve got a stake in files for bankruptcy, chances are you’ll get back pennies to the dollar (if anything). SEC summarizes what may happen to stock- and bondholders during Chapter 11:
“During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”
Once your company files under any type of bankruptcy protection, your opportunities and rights as an investor change to reflect the bankrupt status of the company. While some companies do indeed make successful comebacks after undergoing restructuring, you need to realize that the risks you accepted when you invested in the company can become reality. And if your stake in the pre-Chapter 11 company ends up being worth anything in the restructured firm, chances are it won’t be as much as it was when you first entered your position and it won’t be in the same form.
What should I do, as a creditor, to preserve my rights in a Chapter 11 bankruptcy proceeding?
There are several things that the creditors should do to ensure that their rights are observed. First and foremost, the creditor should seek legal advise from a competent commercial bankruptcy attorney to determine what rights he/she might have and how these rights will be affected by the debtor’s filing of the Chapter 11 bankruptcy petition. Among other things, the creditor should consider whether the claim can be discharged or secured by debtor’s assets.
Second, once the debtor has filed for a bankruptcy, the creditor must cease all collection efforts at once. The creditor then needs to file a proof of claim with the U.S. Bankruptcy trustee so that creditor’s claim would be recognized. Failure to do so will result in the creditor’s claim not being considered during the Chapter 11 proceedings.
How is the Unsecured Creditors Committee formed in a Chapter 11 case?
Immediately upon the filing of the Chapter 11 bankruptcy, the Office of the United States Trustee will send a notice to all creditors of the debtor to ask if anyone would like to serve on the creditors committee. If there are interested creditors, the United States Trustee decides to form a committee, and the Court approves the committee, the committee will be an active participant in the bankruptcy proceeding; protecting the rights of all of the unsecured creditors of the debtor. The fees and expenses of the committee (including the legal fees of the committee) will be an administrative claim; paid by the debtor as part of the debtor’s Chapter 11 plan.
How can a creditor object to the confirmation of a debtor’s plan?
Creditors may object to the confirmation of the debtor’s plan in a Chapter 11 case. Such objections will usually challenge whether the debtor has met the technical requirements of Chapter 11. However, creditors may also challenge the debtor’s valuation of their collateral and the feasibility of the debtor’s plan. The debtor would have to provide his creditors with detailed financial projections which will assist the bankruptcy court in determining whether or not the business may be successfully restructured.
What is the creditors’ competing plan and when can the creditors file it?
The debtor has the exclusivity period and may submit a plan of reorganization within 120 days of the initiation of the bankruptcy case. Any interested party may file a plan thereafter. A plan, including a plan proposed by a creditor, may provide for the liquidation of some or all of the debtor’s nonexempt assets. Such a liquidating plan may be proposed and approved by the court.
How can the “cram-down” affect creditor’s rights?
When an agreement cannot be reached or the creditors’ committee does not approve the payment plan, the debtor will attempt to force creditors to accept the agreement. In order for the debtor to succeed, the debtor must meet certain statutory requirements to compel the bankruptcy trustee to approve the plan without the support of creditors.
What happens in a Chapter 11 bankruptcy after the plan is confirmed?
Confirmation of a plan under Chapter 11 acts as a discharge of all debts, filed or not, excluding those specified as not dischargeable elsewhere in the bankruptcy code. Upon confirmation of a plan, the debtor receives back all his property free and clear of all liens and encumbrances unless such liens are preserved by the plan. Both the debtor and the creditors are bound by the terms of the confirmed plan.