What Are the Essential Contents of a Chapter 11 Plan?

Chapter 11 of the United States Bankruptcy Code provides a mechanism for financially distressed businesses to reorganize their debts and operations. A Chapter 11 plan serves as the roadmap for this reorganization, outlining how claims and interests will be treated. It is based on whether the business can be reorganized for a return to solvency or should be sold, and in either case whether financing can be obtained to effectuate the plan. 

Although a Chapter 11 plan can have many variations, the Bankruptcy Code Section 1123(a) specifies seven mandatory provisions that every plan must include:

• Designation of classes of claims and interests — The plan must designate classes of claims (creditors’ rights to payment) and interests (equity holders’ rights in the debtor). These classes group claims and interests based on their legal and equitable characteristics, ensuring that similar claims receive uniform treatment. Secured claims, priority claims and unsecured claims are typically classified separately. However, administrative and priority tax claims are excluded from classification and must be treated specifically under other provisions of the code.

• Specification of unimpaired classes — The plan must identify which classes of claims or interests are “unimpaired.” A class is unimpaired if the plan leaves its legal, equitable and contractual rights unaltered. By specifying unimpaired classes, the plan informs creditors and stakeholders that their claims will be satisfied as originally agreed, without alteration.

• Treatment of impaired classes — The plan must describe the treatment of each impaired class of claims or interests. Impairment occurs when the plan modifies the rights of the holders, such as by reducing the principal amount of a claim, extending repayment terms or altering interest rates. This provision ensures clarity regarding how the plan proposes to restructure obligations to impaired creditors and stakeholders.

• Equal treatment within classes — The plan must provide the same treatment for each claim or interest within a particular class unless the holder agrees to different treatment. This ensures equitable treatment of similarly situated creditors and prevents preferential arrangements that could undermine fairness.

• Adequate means for implementation — The plan must include adequate means for its implementation. This might involve selling assets, issuing new securities, modifying loan agreements, or merging or consolidating operations. The goal is to demonstrate how the debtor will achieve the reorganization and fulfill its obligations under the plan.

• Prohibition of non-consensual charter modifications — The plan cannot include provisions that allow the debtor to issue non-voting equity securities. Additionally, the debtor’s charter must be amended to limit such issuances. This provision protects creditors and equity holders from governance changes that could undermine their rights.

• Selection of management — The plan must disclose the identity and affiliations of individuals proposed to serve as directors, officers or other management personnel after confirmation. Their selection must be consistent with the interests of creditors and equity holders and comply with public policy.

The purpose of these mandatory provisions is to ensure that a Chapter 11 plan is comprehensive, fair and transparent as a framework for reorganization. An experienced Chapter 11 attorney craft a plan that is most likely to achieve the business’s goals while adhering to the bankruptcy code’s requirements.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company needs help with debt reorganization, call 310-271-6223 or contact us online to schedule a free consultation.