Confirmation of a Plan of Reorganization; Chapter 11 Bankruptcy

Chapter 11 of the Bankruptcy Code allows a debtor to create or develop a Plan of Reorganization that proposes how to dispose of the debtor's assets and treat claims filed against the bankrupt debtor.  This Plan may propose that the debtor reorganize and continue to operate, or to liquidate by selling the assets of the company, or to implement a combination of both.  Confirmation of a Plan of Reorganization involves approval by the bankruptcy Court of the debtor's proposed plan of reorganization.  In fact, it is the official act of the Court in approving a Plan of Reorganization or liquidation. 

When a business files for Chapter 11 bankruptcy protection, the attorney working for the debtor will prepare a written plan of reorganization.  A majority of creditors must approve the plan, but getting that approval can be a difficult or even a daunting task.  Particularly as it relates to small businesses, many companies run out of money before they are able to get their plan approved.   As a result, the debtor is forced to convert their Chapter 11 reorganization to a Chapter 7 liquidation.  The Court may confirm a Plan of Reorganization only if the following requirements are met:

1. The plan must comply with the applicable provisions of the Bankruptcy Code.
2. The proponent of the plan must comply with the requirements of the U.S. Bankruptcy Code relating to disclosure of relevant facts.
3. The plan must be proposed in good faith.
4. The payment or payments proposed to be made in connection with the Plan of Reorganization must be disclosed and deemed to be reasonable, appropriate and adequate.
5. The proponent of the Plan must disclose the identity and affiliation of those proposed to serve in an official capacity in the company after the Plan has been confirmed.
6. With respect to each class of pre petition claims in a reorganization bankruptcy, it is required that each class of creditor either (a) accept the Plan or (b) will receive payment of a value not less than they would have received if the debtor had liquidated.
7. Deferred cash payment with interest for certain priority claims (such as wages, salaries, and employee benefit plans) are permitted as long as the required number of participants in the class approves.
8. At least one class of creditors has accepted the Plan. This requirement is determined without including the claims of insiders.  More specifically, if a Plan impairs any class of claims it cannot be confirmed unless one impaired class of creditors accepts it.
9. Confirmation of the Plan is not likely to be followed by liquidation of the debtor company or the need for further reorganization of the debtor, unless specifically proposed in the plan.

Effects of Confirmation

A confirmed plan binds the debtor and any pre petition creditor, regardless of whether or not the creditor's claim is impaired or the creditor has accepted the plan. A confirmed plan does not do the following:

• Discharge all debts.
• Discharge the debtor if the plan calls for liquidation of the company's assets and if the debtor would be denied a discharge under Chapter 7 of the Bankruptcy Code for any specific reason.
• Discharge an individual debtor from debts included as non dischargeable - as exceptions to discharge

Reprinted with the permission of Credit Research Foundation. 

Edited by Michael C. Dennis