Getting Through Chapter 11 – Part Two: Plan of Reorganization

A. Thomas DeWoskin

By A. Thomas DeWoskin

turbulencePart 5.2 of a 5-part series: Options for Small Business Owners in Financial Distress

Your company’s Chapter 11 bankruptcy has been filed and you’re now running your business under the provisions of the United States Bankruptcy Code.

It’s now time to work toward the ultimate goal of a Chapter 11: a Plan of Reorganization, confirmed by the court, allowing your company to restructure its debts, exit Chapter 11, and continue in business. It is important that you explain all of your concerns about all aspects of your business to your attorney and provide complete and accurate information, all before you even file the case. This will help both of you develop good ideas for successfully navigating your reorganization case and getting a plan confirmed. Advise your attorney if a new problem develops so you can consider all the potential solutions available to you.

Your next steps in planning for reorganization will include you and your attorney:

  • Participating in two mandatory meetings with a U.S. bankruptcy trustee within the first 30 days after filing and begin filing monthly operating reports.
    1. “Initial debtor interview:” Learn procedural issues such as the ins and outs of filing periodic operating reports such as monthly operating reports and where and how your company can bank.
    2. Section 341 “meeting of creditors:” Be questioned under oath by the U.S. trustee’s office about your need to file Chapter 11, your plan to exit bankruptcy, how you will implement your ideas, etc. This meeting is open to all interested parties.
  • Negotiating the terms of your proposed plan with the creditors’ committee if one has been formed by large unsecured creditors.
  • Negotiating lease terms. Any lease which commenced prior to the filing can be “rejected.” You can then renegotiate the terms or terminate the lease, in which case the lessor’s claim will be treated as a pre-petition claim.
  • Treating an equipment lease as an installment purchase agreement secured by the equipment, possibly converting a portion of the secured debt to unsecured and altering the terms of repaying the secured debt.

Although there are numerous objective standards which must be met if a plan is to be confirmed, there are objective factors as well. One of the most important of these is ‘feasibility.’ Implementation of the plan and the projected payments to creditors must be feasible. In other words, it must be reasonably likely (although not guaranteed) that the plan will work as proposed. If the basis of the plan is hope (or fantasy, as one court called it), it will not be confirmed.

You or your accountant will prepare exhibits showing projections of the company’s future profitability if the plan is confirmed and your ability to make the proposed payments. You may also want to include how labor shortages or supply chain problems might affect the feasibility of your plan and how the company could overcome them.

If your initial plan cannot be confirmed, it is not the end of the road. Your attorney (with your guidance) is free to negotiate with the objecting creditors for different treatment. If enough of these creditors accept your new proposals change their votes, your plan would then be approved.

Here are the other posts in this series:

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the March 2022 St. Louis Small Business Monthly.

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