How are creditors paid in a Chapter 11 bankruptcy?

In a Chapter 11 bankruptcy, creditors are paid in one of two ways. The first is through a repayment plan, known as a Chapter 11 Plan of Reorganization. This plan will be developed by the debtor with the help of the court and will provide a payment schedule and interest rate for repayment of their debts. The second way creditors are paid in a Chapter 11 bankruptcy is through liquidation of the debtor’s assets. In this situation, a trustee is appointed to take possession of the debtor’s assets and liquidate them to pay the creditors. The proceeds are distributed according to the priority of the debt. Debts such as taxes, wages, and secured loans, for example, must be paid first. In either case, the debtor in the Chapter 11 bankruptcy has the goal of trying to keep their business afloat and come out of the bankruptcy. The court must approve all repayment plans or liquidation of assets, so creditors can be assured that their debts are being taken care of properly. In some cases, creditors may receive more in repayment than they originally invested or lent out. This is known as a “cram down” and is only applicable under certain circumstances.

Related FAQs

How are creditors paid in a Chapter 11 bankruptcy?

Related FAQs

Related Blog Posts