Reorganization Plans: Compliance with Bankruptcy Laws

A debtor's plan of reorganization generally must be approved by a majority of the creditors. After the plan is approved, it must be confirmed by the bankruptcy court. The confirmation hearings focus on 13 different requirements. This article discusses the first and second requirements, which basically require that the plan and the plan proponent comply with Title 11. Title 11 is the portion of the United States Code that sets forth the bankruptcy laws.

The Plan Must Comply with the Bankruptcy Laws

It may seem peculiar that the law in this regard requires compliance with the law. The reason for this is to ensure that the debtor's plan is consistent with the purpose and goals of the reorganization laws. For example, the classification of creditors under the plan must be correct so that the creditors are not treated unfairly. An unwary creditor might agree to a plan that incorrectly classifies that creditor as inferior. A debtor may impermissibly lump together secured and deficiency claims in one classification. The court has an opportunity to deny confirmation of the plan under such circumstances.

The contents of the plan also must comply with the bankruptcy laws. There are certain provisions that must be included in the plan. For example, the plan must specifically state how impaired creditors are treated under the plan. In addition, the plan must reveal whether any class of claims is not impaired under the plan. These requirements help assist all of the creditors in making an informed judgment regarding the propriety and fairness of the plan. If the requirements are not satisfied, the court can deny confirmation of the plan.

The Activities of the Plan Proponent Must Comply with the Bankruptcy Laws

The second requirement is that the activities of the plan proponent (the debtor) comply with the bankruptcy laws. The court's focus in this regard is on the debtor's disclosures. For example, a debtor can modify a plan after the approval of the debtor's disclosure statement. The court will deny confirmation if the creditors have not received adequate information about the modifications. Some improper activities of the debtor might not preclude confirmation of the plan, such as if the wrongs have been cured or if they are deemed harmless.

Questions for Your Attorney

  • Can you make sure that all requirements are satisfied so that when I get to the point of confirmation I do not run into any problems?
  • What is included in the debtor's disclosure statement?
  • Under what circumstances will the court will deny confirmation of a plan that has been unanimously approved by the creditors?
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