bankruptcy
What happens to debt during a Ch 11 bankruptcy?
<p>Reading newspapers, it seems as if a Ch 11 bankruptcy is like being reborn: you shed off all debts to emerge a pristine new company. But why would debtors agree to this? Aren't they better off with a lower interest % on their loan, or an agreement that they will only have to get paid if the company is turning a profit?</p>
<p>Is it in a Ch 11 necessary for the creditors to agree with the plan of the debtor, or is it enough that the court decides that it's 'fair and equitable' and more than the debtors would get from a Ch 7 bankrupty?</p>

<p>If the creditors and debtor could agree to a plan without the court's involvement, there would be no need for Chapter 11 in the first place. The parties would simply sit down and iron out a deal. This is entirely legal and does not require the court's involvement, provided the deal is subsequently followed. The only reason to go to bankruptcy court is because negotiations have broken down or are impractical (e.g. because a creditor is refusing to negotiate altogether, because there are too many creditors, because the debtor's obligations are too complex, etc.). Bearing that in mind:</p>
<blockquote>
<p>Is it in a Ch 11 necessary for the creditors to agree with the plan of the debtor, or is it enough that the court decides that it's 'fair and equitable' and more than the debtors would get from a Ch 7 bankrupty?</p>
</blockquote>
<p>Pursuant to <a href="https://www.law.cornell.edu/uscode/text/11/1129" rel="nofollow noreferrer">11 USC 1129</a>:</p>
<blockquote>
<p>(a) The court shall confirm a plan only if all of the following requirements are met:</p>
<p>[...]</p>
<p>(7) With respect to each impaired class of claims or interests—<br />
(A) each holder of a claim or interest of such class—<br />
(i) has accepted the plan; or<br />
(ii) <strong>will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date;</strong> or<br />
(B) [snip extra rules for debt secured by a property lien]</p>
<p>(8) With respect to each class of claims or interests—<br />
(A) such class has accepted the plan; or<br />
(B) such class is not impaired under the plan.</p>
<p>[...]</p>
<p>(b)<br />
(1) Notwithstanding section 510(a) of this title, <strong>if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met</strong> with respect to a plan, the court, on request of the proponent of the plan, shall <strong>confirm the plan</strong> notwithstanding the requirements of such paragraph <strong>if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.</strong><br />
(2) [snip further provisions explaining what counts as &quot;fair and equitable&quot; in considerable detail]</p>
</blockquote>
<p>(There are <em>a lot</em> of other provisions in 11 USC 1129. Bankruptcy plans are very complex instruments, and this answer does not purport to give a full exposition of them. There are also a lot of other statutes under title 11 which further complicate the picture, such as <a href="https://www.law.cornell.edu/uscode/text/11/502" rel="nofollow noreferrer">11 USC 502</a>, which determines whether a claim is allowed in the first place. By the time you get to plan confirmation, you've already been through a fair amount of legal process.)</p>
<p>The definition of a class of claims &quot;accepting a plan&quot; is in <a href="https://www.law.cornell.edu/uscode/text/11/1126" rel="nofollow noreferrer">11 USC 1126</a>:</p>
<blockquote>
<p>(c) A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.<br />
(d) A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.<br />
(e) On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.</p>
</blockquote>
<p>In short: You have to get the agreement of creditors holding at least two-thirds of the dollar value in each class, and at least half of the individual claims or interests within that class. But if you convince the judge that a particular creditor rejected the plan in bad faith (e.g. because they are spitefully trying to force the company into Chapter 7 liquidation, rather than because they genuinely expect to get more money by holding out), that creditor is not counted at all. Pursuant to 11 USC <a href="https://www.law.cornell.edu/uscode/text/11/1122" rel="nofollow noreferrer">1122</a> and <a href="https://www.law.cornell.edu/uscode/text/11/1123" rel="nofollow noreferrer">1123</a>, the plan can only group claims together into classes to the extent that they are substantially similar, so you can't just lump a bunch of happy creditors together with the one creditor who doesn't like the plan.</p>
<p>Or, you can meet all of the other requirements, make sure your plan is fair and equitable, and then ask the court to apply (b)(1) and confirm the plan anyway.</p>
