Debtor Strategies in Chapter 11 Bankruptcy
Before filing Chapter 11 bankruptcy the debtor can adopt several strategies to ensure that the plan will be confirmed by the court. In order for a Chapter 11 Bankruptcy case to be successful, the reorganization plan must be confirmed, otherwise the case will be dismissed or converted. If the case is converted into a Chapter 7 Bankruptcy, the debtor will lose their status as a debtor in possession and the business will have to be liquidated by a trustee.
The debtor should give some preference to non-dischargeable claims. Examples of these claims are tax claims, fraud claims, or intentional tort claims. Claims such as these should be paid fully in the plan, otherwise, there is the danger of the creditors suing the debtor for the balance even after a plan is confirmed. Creditors are less likely to approve a plan that does not propose full payment for nondischargeable claims.
In formulating a reorganization plan, the debtor should also consider the tax consequences of the actions proposed in the plan. The sale of assets, for example, can have tax consequences. Taxes will need to be paid which might affect the profits available for distribution to creditors. A good chapter 11 bankruptcy plan will take into consideration the tax effects and mention these in the plan accordingly, together with the debtor’s plan on how to deal with tax consequences. In some cases, the debtor may need to consult with a tax attorney to identify and address the tax consequences of actions proposed in the plan.
Determine Liquidation Value
In order for a plan to be approved, the creditors must receive as much as they would in a Chapter 7 Bankruptcy proceeding. The debtor must include in the disclosure statement (which is submitted before the plan), the liquidation value of the debtor in possession, so that the creditors can assess the viability of the reorganization plan. A debtor should calculate the liquidation value before formulating the plan.
A good plan will also include financial projections for the business, especially if it is a reorganization plan. Financial projections will help the court and the creditors to decide on the feasibility of the plan, especially if the debtor proposes to pay creditors from future profits.