The pinnacle of a chapter 11 bankruptcy is the confirmation of a plan of reorganization proposed and executed by the debtor. This requires that the debtor file a plan which is accepted by the required class of creditors prior to the court confirming the plan. The plan will outline the treatment of the various classes of creditors and it’s the debtor’s exclusivity period that plays a significant role in the plan process.
In order to allow the debtor to try and obtain a consensus amongst its creditors, the bankruptcy code allows for the exclusivity period. Only the debtor has a right to file a plan in the first 120 days of the case being filed. The exclusivity period may be extended up to 18 months if the debtor can demonstrate to the court good cause exists to extend the exclusivity period. However, a creditor can seek to terminate the exclusivity period if it can demonstrate to the court that good cause exists. Doing so would allow other parties in interest to file competing plans of reorganization with the debtor’s chapter 11 plan. The term “cause” is not defined in the bankruptcy code but there is significant case law outlining the relevant factors in determining the cause.
A further protection conferred by the exclusivity period is that a debtor which files a chapter 11 plan within the 120 day period, automatically receives another 60-day extension. This further delays the creditors from filing a plan for a total of 180 days. Debtors who are approaching the 120-day mark and don’t have a complete plan to propose can file their draft plan with the court. This extends their exclusivity period and places the burden on a creditor seeking to terminate the exclusivity period.
Upon the termination of the exclusivity period, any party in interest may file a plan with the court. A party in interest is broadly defined to include the debtor, trustee, equity security holders, creditor committee and equity security holders. However, these parties must have an interest in the outcome of the case. It is in the debtor’s best interest to file a plan prior to the termination of the exclusivity period to prohibit competing plans from being filed with the court.
Small business debtors have an automatic 180-day exclusivity period. The primary requirement for qualifying as a small business debtor is having debt that does not exceed $2 million at the time of filing and no creditor committee appointed by the court.
The filing of a bankruptcy is complex and riddled with nuances that can derail a case. The proper planning and counseling can make the difference between a successful reorganization and the loss of a business.