What Can Delay Completion of a Chapter 11 Bankruptcy?
Chapter 11 bankruptcy allows a financially struggling business to get back on its feet by reorganizing its debts. But there is no definitive timeline for the Chapter 11 process. Depending on numerous factors, winding up a reorganization plan can take anywhere from six months to five years or even longer.
There are multiple procedural stages of a Chapter 11 bankruptcy, each of which is susceptible to delays depending on the complexity of the case. Here are the major steps in the process:
- Reconciling claims — After filing the Chapter 11 petition, the debtor submits a schedule of assets and liabilities. Creditors, upon receiving notice of the bankruptcy filing, must ensure that they are included on that schedule, and if not must file a timely proof of claim. The court then must determine the validity of all alleged debts. If the parties cannot agree on the validity or the amount of an outstanding debt, the court may have to hold hearings to decide on allowing or disallowing it. The claims reconciliation process can easily take a month or much longer.
- Prioritizing creditors — Not all outstanding debts are treated equally. Certain types of debt are paid before other creditors get any money under the reorganization plan. Secured debts, which are obligations guaranteed by a mortgage or lien on the debtor’s property, are paid before unsecured debts. In addition, certain unsecured creditors have priority over others. The parties are permitted to contest the classification of different debts and the amounts to be repaid. If the parties cannot agree on priorities, the court will have to decide. The prioritization process can easily take more than a month to complete.
- Confirming the reorganization plan — The reorganization plan specifies the debts to be repaid and certain details of how the company will be reorganized. Chapter 11 petitioners initially have 120 days to submit a plan. However, the petitioner can request an extension of up to a year and a half. The creditors have the opportunity to file objections and propose modifications to the draft plan. It can take between six months and two years to resolve plan-related issues.
- Resolving claims — Once the reorganization plan is confirmed, the company (known as the debtor in possession) must carry it out under the supervision of the bankruptcy trustee. Approved creditors are paid or given equity amounts according to the terms and schedules set forth in the plan. Payments to creditors usually do not begin until 30 to 90 days from the date of plan confirmation. Since claims are resolved in order of priority, creditors at the bottom of the ladder may have to wait a considerable time until those ahead of them are paid.
With 12 locations across Southern California, the Law Offices of Michael Jay Berger is one of the region’s most trusted bankruptcy law firms, representing both debtors and creditors. Feel free to contact us online or call 310-271-6223 to schedule an initial consultation.