What is the Role of a Confirmation Hearing in Chapter 11 Bankruptcy?

Creating a Chapter 11 bankruptcy plan is an intricate process involving negotiations between the debtor and creditors, with court oversight to ensure fairness and feasibility. The goal is to propose a viable restructuring of debts that satisfies creditor interests while allowing the debtor to emerge as a going concern. During the confirmation hearing, the court evaluates the proposed debt reorganization strategy, and impacted creditors will vote to approve or reject the plan. 

Creating a suitable reorganization plan that meets your unique needs as a debtor or a creditor requires in-depth knowledge of bankruptcy law. An experienced Chapter 11 bankruptcy lawyer can assist you during every step of the process and advocate for you before and during the confirmation hearing. 

How Do You Prepare for Your Confirmation Hearing?

Before a plan can be confirmed, the party proposing the plan must prepare two essential documents: a reorganization plan and a disclosure statement. Ensuring accuracy and persuasiveness in these documents is vital to the outcome of a Chapter 11 bankruptcy.

If you are a creditor, it is important to have thoroughly studied the debtor’s disclosure statement, paying close attention to the context of the bankruptcy and the plan to restructure debt. This will assist creditors in understanding their possible recoveries and evaluating the acceptability of the plan. Once the debtor’s period of exclusivity has ended, creditors can propose a plan of reorganization.

Disclosure Statement

Creditors must have a complete picture of the debtor’s financial situation to make an informed decision when voting on any proposed reorganization plan. The disclosure statement providing this information must be filed within the specified time frame. The statement must include comprehensive information about the debtor’s financial affairs, income, assets, liabilities, and business operations. In addition to being informative, the disclosure statement can also serve as a persuasive tool, convincing creditors that the proposed reorganization plan would be preferable to other options, such as liquidation, and is manageable for the debtor.

Reorganization Plan

The reorganization plan outlines the terms for restructuring the debtor’s debts, operations, and contractual obligations. It classifies and prioritizes creditor claims and explains how the different classes will be treated, including details on interest rates, repayment terms, and other key information. The plan can also propose strategies for the debtor to reorganize their business affairs to improve their income-generating and repayment abilities, using tools such as downsizing, asset sales, or operational changes. The creditor will decide, based on this information, whether to vote to approve the plan.

What Occurs During the Chapter 11 Confirmation Hearing?

During the confirmation hearing, (usually) the debtor presents their reorganization plan to the court and creditors. The court scrutinizes this plan for compliance with legal requirements under the U.S. Bankruptcy Code. Key factors considered by the court include feasibility, how the strategy compares to other available alternatives, compliance with priority rules, and whether the plan discriminates unfairly against any class of creditors.

Following the presentation, the affected creditors will examine the disclosure statement and vote on whether to accept the reorganization plan. For the plan to move forward, it must be approved by certain majorities of impaired creditors. An impaired creditor is one whose claim would be affected under the proposed plan. Creditors may also raise objections to the plan, which the court will consider. If significant issues are raised, the debtor may need to alter their plan and possibly resubmit it for voting.

What Happens if a Debt Reorganization Plan is Approved?

If the plan satisfies all legal requirements and is accepted by the necessary creditor majorities, the court can confirm the plan. Once confirmed, the plan is put into action, reorganizing the debtor’s finances and operations according to its terms. The court oversees the implementation of the confirmed plan, which creates new contractual rights replacing pre-bankruptcy contracts.

What Are the Options if Creditors Reject the Reorganization Plan?

While a rejection of a plan at the hearing is a setback in bankruptcy proceedings, it does not necessarily spell the end of the case. If the plan is not confirmed, the court may allow modifications to be resubmitted for a vote. In other circumstances, the case may be converted to a Chapter 7 liquidation instead of being dismissed.
In certain situations, Chapter 11 bankruptcy proceedings may even be subject to a cramdown or “non-consensual confirmation,” which occurs when the court approves the reorganization plan over the objections of a class of creditors. For a cramdown to be a viable option, the plan must meet all legal requirements, have at least one impaired class vote in favor of the plan, and balance creditor interests with the debtor’s need to restructure their obligations. A skilled bankruptcy attorney can advise debtors and creditors of their options if a cramdown option is suggested.

How Can an Experienced Bankruptcy Attorney Help You?

As a debtor, Chapter 11 bankruptcy can provide an essential lifeline for business owners and others who have significant debts but wish to maintain control of their assets and continue their operations while meeting their obligations to creditors. However, successfully navigating the regulations for debt reorganization and creating a plan that is likely to be approved by creditors and the court can be challenging. If a plan is not approved, the case could be converted to a Chapter 7 bankruptcy, and the debtor may be required to liquidate assets to pay debts, which could lead to a smaller recovery.

As a creditor, careful handling of a Chapter 11 proceeding can mitigate losses and help you to recover at least a portion of what is owed.

If you are considering Chapter 11 bankruptcy for yourself or are a creditor involved in Chapter 11 proceedings, it is vital to enlist the services of a knowledgeable bankruptcy lawyer. While Chapter 11 bankruptcy can have many benefits, it is also the most complex and costly form of bankruptcy. It should only be undertaken after thoroughly examining all available legal options. A skilled attorney from Ortiz & Ortiz, LLP can evaluate your situation and goals to determine whether filing Chapter 11 bankruptcy is right for you, or how to best respond to a bankruptcy filing as a creditor. Our firm can guide you through every step of the bankruptcy process and ensure you are well-informed so you can make decisions that are in your best interests and the best interests of your business. To learn more about our services, contact us online or call 917-920-6437 to schedule a strategy session today.