The Critical Role of Disclosure Statements in Chapter 11

A type of bankruptcy often used by businesses and individuals with large debt burdens is Chapter 11, in which the debtor retains control of its assets and operations while it works to return to financial solvency. The debtor must make regular payments for the benefit of creditors in accordance with a debt reorganization plan approved by the court. However, before that approval can be given, the affected creditors must have a chance to review and object to the plan.

The first step in the approval process is to file with the court a disclosure statement that provides information about the debtor’s finances and business affairs. The statement must have details sufficient to allow creditors to make informed decisions about the reorganization plan.

A disclosure statement includes such elements as:

• The circumstances that caused the bankruptcy
• A description of the debtor’s assets and liabilities
• A summary of the reorganization plan
• The classes of creditors’ claims (such as secured debt and unsecured debt) and how the plan proposes to deal with each class
• The tax consequences of the plan
• The feasibility of the plan
• The creditors’ potential recovery from a Chapter 7 liquidation of the debtor, as compared to the amounts they would receive under the Chapter 11 plan

The disclosure statement must also include any other information the court deems to be necessary.

Once the court reviews and is satisfied with the disclosure statement, it is distributed to the creditors for review. The proposed reorganization plan might impair the claims of some creditors by paying them significantly less than what the debtor owes them or by modifying their rights in some other way. These creditors will have a right to vote on the plan. The court will take the result of the votes into account when deciding whether to approve the plan.

A well-crafted disclosure statement may encourage creditors to accept the plan if it convinces them that they can’t get a more favorable payback and that the alternative to the plan is a Chapter 7 bankruptcy that will result in their receiving even less. An experienced Chapter 11 bankruptcy attorney understands how to prepare a persuasive disclosure statement and comprehensive reorganization plan.

The Law Offices of Michael Jay Berger in Beverly Hills is one of southern California’s most experienced bankruptcy law firms. If your business is in financial distress, contact us online or call 310-271-6223 to schedule a consultation.