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How will creditors affect your Chapter 11 bankruptcy filing?

On Behalf of | Apr 18, 2024 | Business Bankruptcy, Chapter 11 |

When you file for a Chapter 11 bankruptcy, your goal is to reorganize your business affairs, assets and debts in order to make a fresh financial start from debt. It can protect your business’ assets from being seized by creditors, especially if your company is in a pinch.

However, while Chapter 11 can protect your business assets from creditors, your creditors still play key roles in the process.

What will creditors do after you file Chapter 11?

Once you initiate a Chapter 11 case, your creditors have the right to file proofs of claim, which detail the amounts they believe you owe them. Creditors may not need to file if you accurately reflect their claims on your filing.

Creditors can either have claims for secured debt (debt backed by collateral) or unsecured debt (debt without any assets named as collateral). Creditors with secured debt are in a better position than those with unsecured debt since a bankruptcy discharge won’t eliminate a lien on a business asset.

But that doesn’t mean unsecured creditors don’t have any say in your bankruptcy. The U.S. Trustee may appoint a committee of creditors as part of the process. This committee plays a pivotal role in the proceedings, representing the interests of all creditors. The committee will also participate in crafting your reorganization plan for your business.

The reorganization plan and creditors’ influence

Once you propose a reorganization plan, your creditors can vote on it. Creditors have the right to vote on the plan and are classified into different classes based on the type of debt they hold. Secured creditors, unsecured creditors, and equity holders each play a distinct role during this phase.

The approval of the committee is crucial for your reorganization plan to move forward. Creditors can also object to your plan if they find it unsatisfactory. A court will consider these objections when deciding whether to confirm your plan.

It’s a delicate balance to meet both legal requirements and creditor demands.

Going through Chapter 11 involves intricate legal proceedings and negotiations with creditors who have their own legal counsel. An experienced bankruptcy attorney may be able to help protect your interests, guide you through the complexities of the Bankruptcy Code and advocate on your behalf. With legal counsel, you can aim for a reorganization plan that is both court-approved and creditor-accepted, paving the way for a successful restructuring of your debts.