June 30, 2014

Business Bankruptcy: An Overview

Very few Chapter 11 creditors’ meetings resemble Detroit’s $17 billion “cram down” meeting, where Detroit Emergency Manager Kevyn Orr sits down with some 150 to 200 creditors and goes through a 200-page restructuring plan as a prelude to a potential Chapter 9 municipal bankruptcy. Chapter 11 of the Bankruptcy Code is the traditional business bankruptcy provision, which, because of its cost and complexity, is usually the choice of larger corporations.

Reorganization plan

Chapter 11 reorganization allows an enterprise that has potential future revenues greater than the liquidation value of its assets the opportunity to continue its operations under the control of the debtor. Thus, the reorganization plan that proposes methods for repayment and provides a basis for the continuation of the debtor’s business is a central feature of a Chapter 11 bankruptcy.

These plans often call for:

  • Layoffs
  • Rent reduction
  • Reduction of payments to some creditors
  • Extensions of time for repayment

Creditor classes

Classes of creditors are created in accordance with the size and type of debt, as similar creditors must be treated in a similar fashion. Thus, employees who are owed back-pay are put into the same class. Some classes of creditors will not be paid in full, but will receive far less than what they are owed, with payments spread out over longer periods of time. These creditors are called “impaired creditors,” whereas “unimpaired creditors” are fully repaid. Other classes of creditors may not get paid at all. Structuring a reorganization plan that will meet requisite creditor approval is a matter that requires expert professional assistance from an Atlanta business bankruptcy attorney.

Creditor voting rights

Impaired creditors are the only ones who can vote on the reorganization plan, because their rights to collect the full amount owed to them are compromised by the plan. Although they may seem to be in a worse position, those creditors who do not receive anything don’t vote, because they are presumed to have rejected the plan. The vote is counted by class and the plan is deemed to have been approved by a class when a majority of the voters in that class, who hold two-thirds of the total value of the claims in the class, vote in favor of the plan. As long as at least one class of impaired creditors approves the plan, “cram down” rules can force the plan upon everyone else. When the plan is confirmed, the debtor is discharged and claims not specified in the plan are wiped out by the bankruptcy.

The attorneys at Hartman Simons and Wood LLP are knowledgeable advisors who can successfully guide you through the complicated bankruptcy process.

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