When a company wants to restructure its debts, while maintaining business operations, often times it will file for Chapter 11 Bankruptcy in order to establish a plan of paying off creditors. A crucial part of the filing process is submitting a Plan of Reorganization.
What is a Plan of Reorganization?
A plan of reorganization is a comprehensive document, prepared on behalf of a company filing for Chapter 11 Bankruptcy, which outlines how a business plans to repay outstanding debts. This plan outlines exactly how the company plans to repay creditors over a specific period of time.
What are the Elements of a Plan of Reorganization?
The plan of reorganization must detail exactly how each class of creditor will be repaid. The four common creditor classifications are as follows:
- Secured Creditors
- Priority Unsecured Creditors
- General Unsecured Creditors
- Equity Security Holders
When do you file your Plan of Reorganization?
You have 120 days after filing your motion for relief to file your plan of reorganization (this can be extended by up to 18 months if the court approves). After the 120 day exclusivity period expires, creditors or a court appointed trustee can file competing plans of reorganization.
What happens after you file your Plan of Reorganization?
Once you file your plan of reorganization, impaired creditors (those creditors who will receive less than their full claim value) have to vote for or against your plan. Creditors may also file a competing plan of reorganization. The court will then weigh each proposal against the best interests of creditors and stakeholders.
When is the Plan of Reorganization confirmed?
As long as there are no objections to your plan of reorganization, a confirmation hearing will be held. If the court decides that your presented plan is feasible, equitable, and in the best interest of creditors and stakeholders, they will confirm the plan of reorganization.
When a business faces insolvency, it’s often tasked with liquidating assets in order to pay its creditors. One common way to accomplish this is to file for Chapter 7 Bankruptcy. In a Chapter 7 Bankruptcy the liquidation process is administered by a Chapter 7 Trustee assigned by a Federal Bankruptcy judge. The Trustee oversees the liquidation of the debtor’s assets, and disburses the proceeds to creditors.
Recently, a state law alternative to bankruptcy has been growing in popularity with business owners seeking to dissolve companies and liquidate assets. Assignment for the Benefit of Creditors, or “ABC” as it is often abbreviated to, has proven to be a viable alternative to a traditional Chapter 7 Bankruptcy filing that can provide several benefits to businesses faced with insolvency.
The primary distinction between these two liquidation methods is who is tasked with the process of liquidating the business’s assets. In a traditional bankruptcy, the Bankruptcy Court appoints a Trustee to liquidate assets. Alternatively, under an ABC, the business owner selects and hires a third-party to liquidate the business’s assets. Under this approach, the business owner transfers all of the business’s assets to the selected Assignee, and the Assignee then liquidates those assets and disperses the proceeds to creditors.
Since an ABC circumvents the need for the lengthy court process involved in a bankruptcy, it often results in a more streamlined, cost-effective, and faster approach to liquidating a business. Furthermore, it allows business owners to choose an Assignee with domain experience and industry knowledge that can obtain a higher price for the business’s assets.
Since ABCs are a state law, rather than federal law, the exact procedures and laws surrounding the process depend on the state the business operates. Choosing which approach is best for your particular business involves many different factors and requires careful examination by a qualified advisor.
For more information reach out to Jim Gansman at 201-315-2521