Subchapter V Is Good for Creditors

• Published in: American Bankruptcy Institute journal Vol. 43; no. 8; pp. 36 - 65
• Main Author: Bonapfel, Paul W
• Format: Journal Article
• Language: English
• Published: Alexandria American Bankruptcy Institute 01.08.2024
• Subjects: Bankruptcy; Bankruptcy laws; Bankruptcy reorganization; Collateral; Debt; Small business
• ISSN: 1931-7522

A creditor - especially a fully secured creditor - could prefer liquidation to a debtor's attempt to reorganize, but preservation of the debtor's going-concern value through reorganization might result in larger recoveries for creditors. [...]elimination of the absolute-priority rule and the requirement of an accepting impaired class of creditors encourages smaller business principals to provide "sweat equity" by making it possible for owners of the debtor to retain their equity interests upon plan confirmation - a difficult, and often impossible, task under traditional chapter 11. Liquidation A fundamental premise of the Bankruptcy Code is that by preserving the debtor's going-concern value, reorganization makes more money available for creditors.13 From the standpoint of unsecured creditors, anecdotal experience in the context of a smaller business is that the premise is usually correct. [...]reorganization frequently enhances the value of collateral through the realization of going-concern value, either through preservation of the business or a sale as a going concern. Because unsecured creditors are almost always better off through reorganization than liquidation, subchapter V is good for unsecured creditors because it makes reorganization possible in many cases that would otherwise result in the sale of assets in nonoperating liquidations.