Operating Plan in Chapter 11 Bankruptcy
As mentioned in our previous articles, there are different kinds of plans that the debtor can choose from in chapter 11 bankruptcy. For this article, we will be discussing the most common plan chosen in chapter 11 bankruptcy – the operating plan.
Although chapter 11 bankruptcy is more commonly known as reorganization bankruptcy, the debtor can very well choose to submit a liquidating plan for the business. On the other hand, if the debtor believes that the business can still be profitable in the future, the debtor may choose to submit an operating plan. An operating plan is a good idea if the business is still earning profit but cannot meet debts and claims as they become due. In an operating plan, the debtor seeks to find a way to pay off the existing claims while at the same time remaining in control of the business operations.
Whatever kind of plan the debtor chooses to submit, the plan must be approved by the creditors and bankruptcy court. At the very least, the creditors should receive as much as they would in a chapter 7 bankruptcy liquidation.
An operating plan presupposes that the business is still profitable, or at least that the business can be profitable if given the opportunity to reorganize. The business continues to operate, run by the debtor in possession. This plan is the better option for businesses that cannot presently pay off outstanding debts but may be able to do so in the future.
Source of Payments
The source of payments for the debts in an operating plan usually come from profits that the debtor expects to make after the plan is confirmed. This distinguishes it from a liquidating plan, where the payments are sourced from the proceeds of the sale of assets.
Typically, an operating plan will involve a renegotiation of the debts, especially the time period for payment. Creditors are divided into classes, such as secured creditors and unsecured creditors.
For secured creditors, the operating plan involves stretching out the debt. This means extending the period in which the debt has to be paid. Secured creditors have debts that are secured by properties or assets. Accordingly, they are usually paid the full value of the debt. Interest may be required depending on the situation involved. Usually, a reduction of interest for the early years after confirmation is also included in the plan.
Unsecured creditors, on the other hand, have debts that are not secured by properties or assets. Unsecured debtors are usually paid only a percentage of their claims under an operating plan, as opposed to payment of the full amount. The debtor can also choose several methods of paying an unsecured creditor. One method involves paying the unsecured creditor a percentage of profits for a period of years rather than the entire amount of the debt.
Best Interest of Creditors
In some instances, a debtor in possession may be required to pay all the debts in full, or at least close to full. This happens when the hypothetical sale of the debtor’s assets can pay the debts in full. For example, the debtor’s business possesses several valuable but low-earning properties. This can be enforced by the court because in order for the plan to be confirmed, the creditors must receive as much as they would in a chapter 7 bankruptcy liquidation.
For an operating plan to be successful, the creditors must have confidence in the debtor-in-possession’s ability to make the business profitable. This can be a point of contention in the case as creditors may be skeptical about the debtor’s ability to turn the business around.