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How does a reorganization plan work in Chapter 11 bankruptcy?

Businesses in New York have value in different ways. They have a revenue stream based on the amounts they collect from their customers and clients. They also may own property, equipment and other property of value, which will add to the overall value of the company. Sometimes, a company may have a downturn in business and soon their debts may be significantly higher than their value.

Companies may find it difficult or impossible to keep making debt payments due to a reduction in their income stream or an increase in costs in other areas of the business. Bankruptcy may not be something they want to do in fear of losing the business, but through Chapter 11 bankruptcy, they may be able to reorganize as opposed to simply liquidating the business and paying creditors.

Basics of a reorganization plan

Through Chapter 11 bankruptcy, companies create a reorganization plan. There are certain requirements that the reorganization plan must meet. The plan must designate classes of debtors, keeping similarly situated creditors in the same class and treating all creditors in the same class equally.

The plan needs to identify any creditor who will be impaired by the plan and explain how the plan impairs the creditors. Finally, the plan needs to provide sufficient evidence of how they will be able to make the plan work. After the plan is submitted, impaired creditors can object and ultimately it is up to a judge to confirm the reorganization plan, which can be done over impaired creditors’ objections.

Bankruptcy is something companies in New York like to avoid at all costs. There are situations when Chapter 11 bankruptcy is the companies’ best option given the financial circumstances they face. This is especially true because through Chapter 11 bankruptcy, the company can continue the business if they can make a reorganization plan work. This is a complicated area of the law though and consulting with experienced attorneys who understand the process can be beneficial.

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