Reorganization plans in the context of bankruptcy refer to structured plans created to help a financially distressed company (or individual, in rare cases) restructure its debts and continue operating, rather than liquidating its assets.
Here’s a breakdown of what reorganization plans are and how they work:
What is a Reorganization Plan?
A reorganization plan is a detailed proposal submitted by a debtor (usually under Chapter 11 bankruptcy in the U.S.) outlining how it intends to:
- Restructure its debts and obligations
- Modify payment terms
- Treat different classes of creditors and shareholders
- Keep the business operational during and after the bankruptcy process
Key Features of a Reorganization Plan
- Debt Repayment Schedule: Proposes new terms for repaying creditors (often at a reduced amount or over a longer period).
- Operational Changes: May involve downsizing, selling assets, or changing business strategies.
- Creditor Classification: Creditors are grouped into classes (e.g., secured, unsecured, priority) and treated according to their classification.
- Voting: Creditors vote to accept or reject the plan. If approved by a majority and confirmed by the bankruptcy court, it becomes binding.
- Court Approval: The bankruptcy judge must confirm that the plan meets legal requirements and is fair and feasible.
Reorganization vs. Liquidation
- Reorganization (Chapter 11): Aims to allow the business to survive and eventually thrive again.
- Liquidation (Chapter 7): Involves selling off all assets to pay creditors and closing the business.
Example Scenario:
A retail chain files for Chapter 11 bankruptcy. It proposes a reorganization plan to:
- Close underperforming stores
- Renegotiate lease terms
- Pay creditors 60 cents on the dollar over 5 years
- Keep key employees and operations intact
Even though Chapter 11 allows for reorganization and continued operation, some businesses opt for Chapter 7 instead.