Why It Can Take So Long for Payout Recovery in Chapter 11 Bankruptcy

Here at Hausen Law, LLC we work day in and out with folks who are going through bankruptcy, so we usually share information directly related to their concerns. But there is another side to this coin: the creditors. Oftentimes the financial stress that the individual filing for bankruptcy brings on them can get lost in the conversation. So today we’re going to focus on creditors’ bankruptcy questions, one of which is why it can take so long to receive their chapter 11 bankruptcy payout.

Chapter 11 Bankruptcy Basics

Every single chapter 11 bankruptcy case can be bisected into two distinct phases: pre-confirmation and post confirmation. Once the mandatory reorganization plan is drafted and approved by creditors the court then finalizes it and the plan takes effect. While it can sound very cut and dry when laid into a timeline, it’s important to know just how long these periods can last.

Once a chapter 11 filing is made, the following “exclusivity period” gives the debtor the right to draft and share their reorganization plan. This period is typically about four months’ time, or roughly 120 days. Once the plan is filed, it can be contested by the creditors and deliberated back and forth and potentially amended. Clearly, if creditors accept the plan, it can then be implemented and repayment can begin. Any objections will stall repayment progress. But if a creditor’s claim is not listed, is inaccurate, or is marked as being ‘disputed’, ‘contingent’, or ‘unliquidated’ it is worth their efforts and time to exercise their legal rights and file an official Proof of Claim before the court-appointed deadline.

The debtor or trustee would then need to review and respond. Having compared the creditor’s assertions with their own financial records, they can confirm or deny the asserted debt amounts and move on from there. It’s easy to see how this back-and-forth process could end up being drawn out if amounts are not accurate from the beginning. But there are more factors at play that could make a creditor’s claim seem uncertain.

Potential Delays

We mentioned that the exclusivity period of 120 days is afforded to the debtor to allow them time to draft, review, and submit a reorganization plan. But that isn’t always the end of the story. If a debtor is unable to develop a viable plan in that standard timeframe, they can request an extension from the court of up to 18 months from the petition date before their mandatory plan must be submitted. Clearly there is a massive difference in time here, and this delay alone could make it seem as if creditor payout will never happen.

In the instance where a debtor fails to submit their plan on time and hasn’t requested an extension, that 120 days has still elapsed, but it then falls on creditors to draft and submit their own plan. It would then be subject to the same scrutiny that a debtor’s plan would have been, along with the typical voting, approval, and confirmation. Even in just this one vital element of the chapter 11 bankruptcy process, there is such a large margin for time spent, it’s easy to see how months could pass without creditors receiving a quick payout or being guaranteed a standard or expected timeframe.

A note on confirmation: it sounds like a simple thing, but let’s break down what is actually involved in this key step. Not only does the court have to approve and confirm the plan, but each class of creditors does as well. Should any one of them object to the plan, the debtor is then given 180 days to work things out and gain the necessary acceptances. But should they need more time, they can make an official request to the court for an extension of up to 20 months. And at that point, it is still possible that the creditors could choose to reject the new plan. The extensions can really stack up and drag out proceedings far beyond average estimates. So can potential modifications that the debtor may choose to make along the way. And if the case is dismissed altogether or perhaps converted to a chapter 7 bankruptcy case, then a lot of time has been spent on something that isn’t even going to come to fruition.

Key Repayment Factors

On average, a chapter 11 bankruptcy case can last over a year and half––that’s just to finalize the repayment plan, not actually begin repayment. And once repayment does begin, it could take from three to five years to complete. That time frame is baked into the process and it typically helps the debtor to manage operational expenses while also repaying their debts, but it could seem unduly lengthy when you’re on the other end of the deal.

As noted above, if creditors want to contest a debtor’s rendering of their debt, they can file a Proof of Claim to the court. The debtor or trustee must then respond, and if they object, that response must include a written statement, along with a notice of a hearing that is at least 30 days out. In the end, the court hearing will attempt to resolve all objections, which could include disallowing claims filed by creditors. But regardless of the outcome, there is a lot of time tied up in the negotiation process that leads up to the first round of repayments being issued.

Another factor that perhaps doesn’t get enough attention is that not all creditors are repaid at the same time. Creditors vary by priority class, with those in the highest classes receiving repayment first, as disclosed in the debtor’s reorganization plan. If you’re a creditor in a lower repayment class, this repayment scheme is just one more factor that could make it seem like an extra lengthy process. 

The priority levels are as follows, listed from highest to lowest:

• Secured Creditor: guaranteed by collateral or a lien specified via contract with the debtor
• Unsecured Creditor, Priority Claim: could be bank lenders, employees, the government (taxes), suppliers, or investors
• Unsecured Creditor, Non-Priority Claim: might include credit card debt, student loans, personal loans, utility or medical bills
• Unsecured Equity Security Holders: stockholders in the business

Regarding creditor priority, sometimes it’s the case that one creditor falls into several categories based on multiple claims they hold against the debtor. Because their repayment priority can vary across claims, their total repayment would naturally be drawn out. And creditors that hold unsecured claims are not actually guaranteed repayment unless they have a priority claim.

Repayment will typically begin anywhere from 30 to 90 days after the court’s official confirmation of the repayment plan. Though secured creditors earn top priority and will receive full repayment, many others won’t see a payment that matches their full claim value––such is the nature of the process. This is especially true if the debtor provides promissory notes or equity in the reorganized company in place of more liquid assets, like a cash payment. Negotiating repayment plans that stretch over multiple years is also a possibility. All these factors combined should clue creditors in to why payout isn’t immediate and help to prepare them for what could potentially be a long haul.

Rely on the Experts

Chapter 11 bankruptcy is a complex process, with many parties’ interests at stake. Working with an experienced bankruptcy attorney is the best way for debtors and creditors to ensure that their rights are protected, come what may. To work with a seasoned Ohio bankruptcy lawyer, get in touch with us at Hausen Law, LLC, where you’ll benefit from the expertise and skills of James F. Hausen. He has handled over 2,000 cases and serves the Akron and Canton areas. Contact Northeast Ohio Bankruptcy Attorneys to set up a free consultation and learn whether chapter 11 bankruptcy is the best course for you.