Creditors maintain rights to seek payment when businesses file for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Corporate Finance Institute describes how after filing for bankruptcy protection, a business may also continue operating as a “debtor in possession.”
As noted by UScourts.gov, a DIP may use, lease or sell assets in its ordinary course of business. Chapter 11, however, requires DIPs to submit reorganization plans. A plan generally includes a schedule of liabilities, asset classes and a creditor listing. Secured lenders take priority over unsecured creditors.
A debtor in possession takes on duties and faces creditors’ claims
A U.S. bankruptcy trustee supervises the DIP’s reorganization. The debtor becomes a fiduciary of assets and must perform duties such as accounting for properties and filing reports. A U.S. trustee also reviews creditors’ claims, which the trustee may approve or deny.
Unlisted creditors may file a proof of claim against the DIP for repayment with the court. Lenders listed in a bankruptcy petition as unliquidated, disputed or conditional may also file claims. By doing so, they may recover payment during a company’s reorganization.
Creditors may push to liquidate or agree on reorganization plans
DIPs with overwhelming debt loads could find some creditors pushing them to liquidate assets. A debtor in possession may also work with creditors to accept less than the balances owed.
Harvard Business School reported that creditors recovered significantly less when companies liquidated or found an acquirer. When creditors instead agreed to reorganization plans, they had a greater chance of retrieving more than half of each dollar owed.
Chapter 11 bankruptcy may include a creditors’ committee approving a reorganization plan. A petitioner’s notice states a final date when the court must receive creditors’ claims. Neglecting to file a timely claim may result in creditors waiting until a business reorganization is complete before they may recover.