Why Would The Court Deny A Chapter 11 Plan? | LA County Bankruptcy Law Attorney Explains

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Law Offices of Nicholas Gebelt
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To put it on a gut level, the idea is a plan is feasible if the debtor has the resources to consummate the plan to make the payments to make it work. But there are a lot of moving parts here. So in the answer to the last question, I said that creditors are put into these various priority classes and they have to be paid according to the order of priorities. And so if the debtor has insufficient income, insufficient assets to liquidate to make that happen, then we can say this is not a feasible plan because you cannot satisfy the requirements of payment to the creditors that are found in the bankruptcy code.
I mentioned the priority classes, and I also mentioned that there was a class below the standard priority classes, and that's the general unsecured creditors. While the priority creditors typically have to be paid in full, the non-priority general unsecured creditors don't necessarily have to be paid in full. So how does this work? Well, one of the requirements of a Chapter 11 plan is sometimes referred to as the chapter 7 liquidation requirement. In essence, what it says is over the life of the plan, the debtor must repay the general unsecured creditors at least as much as those creditors would've gotten had the debtor done a chapter 7liquidation? And we'd like to think of two versions of chapter 7 liquidation. One for businesses, the other four individuals and legally married couples. So let's start with individuals and legally married couples.
When an individual files a chapter 7, the goal is just to erase debts without making payments to creditors at all. And of course, from the creditor's perspective, that's a [inaudible - 0:02:30.3]. So there are some limitations. One limitation is on what the debtors get to keep. So the debtors get to keep some stuff, but there's at least the potential to lose assets in a Chapter 7 bankruptcy. So one of the things we include in a set of chapter 7 bankruptcy papers is a complete listing of everything the debtor owns or has an interest in. And all of those assets get divided into two categories, exempt and non-exempt. The exempt stuff, that's the debtors, the non-exempt stuff is fair game for the chapter 7 trustee to seize, liquidate, and have money to pay creditors. In a Chapter 11, the debtor doesn't lose assets unless it's part of the plan, but we still go through the exercise of listing all the stuff, dividing it into exempt and non-exempt categories because whatever the dollar value is of the non-exempt assets is the minimum that the debtor can get away with repaying the general unsecured creditors over the life of the plan.

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