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Chapter 11 and Chapter 13

Reorganizations and Payment Plans under Chapters 11 and 13

As an alternative to liquidation, the Bankruptcy Code permits parties to restructure the organization and finances of a business so that it may continue to operate. The Code also allows individual debtors who owe unsecured debts of less than a certain statutory dollar amount and secured debts of less than a certain statutory dollar amount and who have a regular income, to adopt extended time payment plans for the payment of debts. A plan for reorganization of a business, as well as extended time payments for individuals, must be confirmed by the court. Generally, these plans must be acceptable to the majority of the creditors, and then the decision of the court is binding upon the minority creditors who do not accept the plan.

Individuals, partnerships, and corporations in business may reorganize under the Bankruptcy Code. This is referred to as a Chapter 11 Plan. With regard to business reorganization, the first step is to file a plan for the reorganization of the debtor. This plan divides ownership interest and debts into those that will be affected by the adoption of the plan and those that will not. It will specify what will be done to those interests and claims that are affected by the plan. The plan must be confirmed by the court. Once the plan is confirmed, the owners and creditors of the business have only the rights that are specified in the plan and cannot change their positions.

An individual debtor on a regular income may submit a plan for installment payment of outstanding debts. This is called a Chapter 13 Plan. This plan must also be confirmed by the court. Once it is confirmed, debts are paid in the manner specified in the plan. After all payments called for by the plan are made, the debtor is given a discharge. The plan is, in effect, a budget of the debtor’s future income with respect to outstanding debts. The plan must provide for the eventual payment in full of all claims entitled to priority under the Bankruptcy Code. The plan will be confirmed if it is submitted in good faith and is in the best interest of the creditors.

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Inside Chapter 11 and Chapter 13