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A reorganization plan in Chapter 11 bankruptcy

Any of our readers who are familiar with previous posts here regarding Chapter 11 bankruptcy probably remember that submitting a reorganization plan is a key part of the bankruptcy process. The plan is not only focused on debt reorganization, but also on potential reorganization moves within the company in order to streamline operations and - hopefully - return to profitability.

In a Chapter 11 bankruptcy filing, the debtor - the company filing the action - has an exclusive window of 120 days to file a reorganization plan. This window of 120 days is automatic, but this timeframe could be modified by the court - either extended or reduced. However, this timeframe cannot be extended indefinitely, as the maximum amount of time a court can extend this filing window is 18 months.

So, what happens if the debtor fails to file a reorganization plan within this initial filing window? Well, that is when the creditors can step in and file a plan of their own. In some cases, a creditor's plan may include options for the company to remain in business throughout the bankruptcy process as the creditor looks to receive a maximum amount of repayment on the debts owed. In other cases, the creditors may simply want to cut their losses and close the company down.

The reorganization plan is a crucial part of any Chapter 11 bankruptcy filing. That is why many companies that are planning to file a business bankruptcy will formulate a reorganization plan before they even submit the initial filing. This is usually known as pre-packaged bankruptcy, where the debtor and creditors have already agreed to a reorganization plan ahead of time.

Source: uscourts.gov, "Chapter 11 - Bankruptcy Basics," Accessed Sept. 7, 2015

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