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Plan for Adjustment of Debts

The plan of adjustment is a document that provides for the treatment of the various classes of creditors’ claims against the municipality. The Bankruptcy Code requires a debtor to file a plan.  The plan can be filed along with the bankruptcy petition or at such later time as the court fixes.  Chapter 9 does not allow the creditors or other parties in interest to file a plan.  This limitation allows a municipality to be in control of its governmental affairs during a chapter 9 case.   Further, neither the creditors nor the court can indirectly control the affairs of a municipality by proposing a plan of adjustment of the municipality’s debts that would in effect determine the municipality’s future tax and spending decisions.

The plan, in order to be confirmed, must be accepted by one half in numbers and two thirds in amount of each class of claims that is impaired under the plan. Additionally, chapter 9 contains several other requirements that a plan of adjustment must meet to be confirmed by the bankruptcy court.  For example, the municipal debtor must not be prohibited by law from taking any action necessary to carry out the plan, the plan must a feasible one , all post-petition administrative claims must be paid in full are few of the requirements.

The plan of adjustment should also be one that is in the best interest of the creditors. As its difficult to determine the liquidation value of a municipal debtor, this test has been interpreted to mean that a chapter 9 plan of adjustment need only be “better than other alternatives,” which is the dismissal of the chapter 9 case.

If a municipal debtor’s plan meets all of the confirmation requirements, except receiving the support of an impaired class of creditors, the bankruptcy court can still confirm the plan through a cram down of the dissenting classes. In case a plan of adjustment is not approved by the bankruptcy court, the bankruptcy court may dismiss the chapter 9 case, which means that the municipality would no longer be under the protections set forth in chapter 9.

Inside Plan for Adjustment of Debts