What Happens to Money Owed in a Business Restructuring Plan?

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Restructuring plans are a requirement for businesses that file bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Chapter 11 bankruptcy allows a business to continue operations under a court-approved reorganization or restructuring plan for paying debts. Once a business owner files for Chapter 11 bankruptcy, a “stay” prohibits actions by creditor to collect debts. After a plan is in place, the bankruptcy codes and the business’ reorganization plan guide disposition of money owed to the business or to creditors.

Reorganization Plan

After filing a Chapter 11 bankruptcy case a business has 120 days to create and file a voluntary reorganization plan and provide disclosure statements to creditors. Creditors evaluate, approve or reject the plan. The bankruptcy court confirms or rejects the plan. The reorganization plan allows the business to pay portions of debts, discharge some debts, terminate contracts and recover assets. The plan details the process for the business to adjust operations, reduce debt and return to profitable operations. Small business cases are handled differently than bankruptcy cases for larger business, including additional court oversight and attention to the reorganization plan and business operations.

Confirmed Plans

Confirmed reorganization plans are legally binding for creditors and the debtor that has filed bankruptcy. A confirmed plan discharges debt that existed before the confirmation date. The plan classifies debtors as secured creditors, equity security holders and general or prioritized unsecured creditors. The plan includes a detailed payment plan for repayment of debts and, if approved, liquidation of assets. Reorganization plans may be adjusted or replaced with new plans after voting by creditors and approval of the bankruptcy court. The business must adhere to payment schedules in the reorganization plan.

Pre-petition Debts

Bankruptcy law prohibits businesses in Chapter 11 reorganization to pay for services or goods the business received before the filing date for the bankruptcy case. Pre-petition invoices cannot be paid until the court approves a reorganization plan. Post-petition invoices for purchases made after the filing of the bankruptcy are paid normally and receive priority over pre-petition debts. The reorganization plan details how much of pre-petition debts are paid and when the debts are paid.

Non-discharged Debts

Bankruptcy does not allow the discharge of some of the business’ debts, including certain taxes, child support, alimony, government-guaranteed education funds, some orders for restitution and debts stemming from personal and property damage of a malicious nature or involving intoxication. A creditor may file a petition to declare non-dischargeable those debts related to assets obtained under false pretenses or through fraud.