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How creditors are paid in a Chapter 11 bankruptcy

On Behalf of | Jun 5, 2023 | BANKRUPTCY LAW - Chapter 11

Businesses in Idaho and around the country file Chapter 11 bankruptcies when they become financially insolvent and need time to reorganize. Companies that seek Chapter 11 bankruptcy protection are able to continue trading, but they are protected against debt-related lawsuits and other collection actions. During the Chapter 11 process, struggling companies seek renegotiate their debts and streamline their operations in hopes of returning to profitability, which is why Chapter 11 proceedings are also often called reorganization bankruptcies.

Reorganization plans

Businesses that file under Chapter 11 are required to submit reorganization plans to their creditors. Once this plan has been reviewed and accepted by the company’s creditors, it is sent to the bankruptcy trustee assigned to the case for final approval. Reorganization plans must make clear how the company plans to return to profitability, restructure its debts and pay its creditors.

How creditors are paid in a Chapter 11 bankruptcy

Creditors are separated into three types when a company files for Chapter 11 bankruptcy protection. Secured creditors are paid first. These are creditors with loans that are secured by assets like real estate or vehicles. In the vast majority of Chapter 11 cases, there are far more unsecured creditors than secured creditors. Unsecured creditors are usually suppliers, vendors and contractors. General creditors like shareholders are given the lowest priority. When funds are available to pay general creditors, shareholders who own preferred stock are paid before shareholders who own common stock.

Protecting companies and creditors

Some of America’s biggest companies have filed Chapter 11 bankruptcies, and most of them emerged from the process leaner and more competitive. Chapter 11 bankruptcies allow businesses to continue trading while they address their financial challenges, which means creditors are more likely to be paid. If Chapter 11 protection was not available, struggling companies would be forced to close down and liquidate their assets.