This post is part of a series of posts entitled First Considerations for the Financially Distressed Business. For a comprehensive list of articles contained in this series, click here. The good news for a chapter 11 debtor is that a debtor and its creditors are basically free to agree to any plan that they believe meets their respective needs. However, if a creditor objects to the plan, the bankruptcy court is required to consider certain factors, including:

  • Feasibility: The bankruptcy court must determine whether the plan proposed by the debtor is “feasible” or likely to succeed. Bankruptcy courts want to avoid confirming plans that are then quickly followed by liquidation or further reorganization. • Good Faith: This requirement is strictly a judgment call made by the bankruptcy court. It has been construed to mean that the plan must be proposed with honesty by the debtor and with an intention of actual reorganization (or liquidation).
  • Best Interests of Creditors: The “best interests” test requires that each creditor receive at least as much under the proposed plan as it would if the debtor’s case was converted to a chapter 7 case (i.e. the debtor’s property was sold and distributed to creditors). In other words, it establishes a minimum level of recovery for creditors.
  • Fair and Equitable: Any proposed plan must also be “fair and equitable.” This requirement is a legal-based analysis that requires certain determinations to be made by the bankruptcy court.

In most cases where a plan is confirmed, it is because the debtor has worked very closely with its secured creditors (and/or unsecured creditors) to make a deal of some sort which is then incorporated in the terms of the plan. While it will look different for every debtor— as the deal must meet the specific needs of both the debtor and the creditor—it may include: restructuring a loan, returning collateral to a secured creditor, deferring payment for a certain amount of time, modifying payment terms or selling collateral to a third party. Reaching a deal is not required, however, as the Bankruptcy Code does allow a debtor to move forward with confirmation of a plan if it has the support at least one class of creditors whose rights are modified under the plan regardless of whether a secured creditor may object.