Chapter 11 vs. Chapter 13 plans
This serves as a lesson for Chapter 13 bankruptcy attorneys about the importance of creating a plan that will be accepted by your clients’ creditors as well as the court. In Chapter 11 cases, a plan must designate classes of claims and interests for treatment under a reorganization plan. (11 U.S.C. §1123(a)(1)) Usually a Chapter 11 plan classifies claim holders as secured, unsecured with priority, unsecured, and equity security.
In a Chapter 13 case, there are three types of claims: priority, secured, and unsecured. Priority claims include taxes and bankruptcy proceeding costs. These claims must be paid in full unless a creditor agrees to a different payment plan. (11 U.S.C. §1322) There are different plans to pursue regarding secured claims with collateral, depending on various factors. But generally if a debtor wants to keep the collateral that secures a particular claim, that holder of the secured claim is entitled to receive at least the value of the collateral.
Under Chapter 11, any interested party may file an objection to confirming a plan. The court must hold a confirmation hearing after notice has been given. If no objection is filed, the court determines whether the proposed plan is made in good faith and according to law. (Federal Rules of Bankruptcy Procedure 3020(b)(2)) The plan must also be feasible. Similarly, in Chapter 13 the court must hold a confirmation hearing to decide if the plan is feasible and meets the requirements for confirmation under the law. (11 U.S.C. §1325) A notice is sent to all creditors 28 days before the confirmation hearing and any objection to the plan can be made. (Federal Rules of Bankruptcy Procedure 2002(b))
If the court confirms the Chapter 13 plan, the trustee will begin distributing funds received under the plan. (11 U.S.C. §1326(a)(2)) If the court does not confirm the plan, the debtor may:
- File a modified plan (11 U.S.C. §1323)
- Convert the case to a liquidation case under Chapter 7 (11 U.S.C. §1307)
The court may also decide not to confirm the modified plan or to dismiss the case.