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Benefits of a Chapter 11 Bankruptcy

Chapter 11 allows a debtor to cease the collection activities, including civil lawsuits, filed by its creditors. The debtor, whether an individual or business is the only party allowed to file a plan of reorganization during the initial 120 days after filing the bankruptcy. However, a class of impaired creditors – defined as creditors whom the plan does not propose to pay in full – can reject the plan. Despite this, a debtor can cram down a plan on impaired creditors by meeting the criteria outlined in the bankruptcy code.

The exclusivity period is the initial period of time where only the debtor can propose a plan. If the plan is not accepted, creditors can file a competing plan at the expiration of the exclusivity period. As mentioned above, should the creditors not accept the debtor’s plan, Section 1129 of the bankruptcy code provides the requirements necessary for a debtor to “cram down” a plan on impaired creditors.

These requirements include unfair discrimination and fair and equitable treatment. The unfair discrimination prong is in respect to dissenting classes. Courts employ various tests to determine unfair discrimination. But different treatment alone does not constitute unfair discrimination. When determining the second prong of fair and equitable treatment, the court looks at whether the unsecured creditors receive payments equal to the amount of the claim and prior to junior claims receiving any payments at all.