During a Chapter 11 bankruptcy case, a Creditors' Committee is appointed by the U.S. Trustee to represent the Creditors’ interests, each of the secured and unsecured creditor classes. Typically, between 5-7 Creditors with the largest claim amounts within their respective creditor class are selected to serve on the Creditors’ Committee. The Committee’s primary role is to put aside their interests and assist in the formulation and confirmation of the Debtor’s Plan of Reorganization to ensure the interests of their creditor class are equitably represented.
The Creditors’ Committee takes on several responsibilities, including acting as the liaison between the Creditor parties, the Debtor or case trustee, and the bankruptcy court to develop an equitable Reorganization Plan. In addition to being more deeply involved with the details of the case proceedings, the Committee has broad responsibilities to investigate the Debtor’s conduct and continuing business operations so as to best advise the members of their Creditor class it represents. The Creditors’ Committee may also seek to convert the Chapter 11 case to Chapter 7 if necessary.
If eligible, Creditors can decide whether they would like to serve on the Creditors’ Committee. There are both pros and cons of joining. Read on to learn how serving can work to a Creditor’s advantage and disadvantage.
Benefits of Joining the Creditors’ Committee
1. A Creditor’s chance to be heard is enhanced.
As a Creditor, serving on the Creditors’ Committee provides a way to ensure your voice will be heard by the court. In order to counterbalance the position of the Debtor, bankruptcy courts typically pay close attention to the interests and concerns of the members of the Creditors’ Committee – especially that of the unsecured Creditors. Those that want to guarantee their issues are given fair consideration can use their status on the Committee to gain a consensus among the members and effectively communicate these issues to the court.
2. It provides an opportunity to network with peers in the same industry.
Joining the Creditors’ Committee offers a unique opportunity to connect with others within the same industry niche while getting an inside look into their operations and attempting to fix what wasn’t working in their business dealings with the Debtor—often a shared customer or common client. In the event of a successful reorganization, the potential of working alongside your peers or competition to sort out the Debtor’s restructuring could lead to more favorable business opportunities.
3. Costs of legal representation and other expenses are shared.
Another advantage of serving on the Creditors’ Committee is cost-sharing. With approval from the bankruptcy court, the Committee is granted permission to seek legal counsel, independent accounting services, or other professional assistance to aid in their fiduciary duties of representing the creditor interests in their class. The costs of hiring representation is reimbursable by the bankruptcy estate, along with other necessary and reasonable expenses incurred by the Committee in their service. Although these expenses are ultimately deducted from the overall estate distribution, this cost-sharing arrangement allows individual Creditors to pool their resources and avoid covering the upfront costs of hiring an attorney on their own.
Drawbacks of Joining a Creditors’ Committee
1. Creditors are not compensated for serving.
It is important to note that Creditors are not compensated for the significant time commitment involved in serving on the Committee. While the bankruptcy estate will cover certain expenses, Creditors often must pay for their own travel to and from committee meetings and do not receive any form of payment for their involvement.
2. Serving is time-consuming.
The time commitment of serving on the Creditors’ Committee varies depending on the Chapter 11 case’s complexities. For many cases, however, serving requires a Creditor to keep their schedules clear and dedicate a significant amount of time to meetings with the other Committee members, legal counsel,, and negotiations with the Debtor or trustee. It is wise only to consider joining the Creditors’ Committee if you can set aside the time to be fully involved.
3. Dealing with conflict amongst creditors and Committee members.
Serving on the Creditors’ Committee comes with great responsibility and often great stress. Members of the creditor's committee must collectively agree on what is fair for all of the creditors in their class whom they represent. With competing interests between creditors in the class, this can cause an already difficult situation to become more challenging. Plus, the larger and more complex the Ch.11 case, the more discrepancies and conflicts may arise in reaching a consensus.
The Bottom Line
Ultimately, the decision to join a Creditors’ Committee depends on the amount of time you’re willing to dedicate to the process and how strongly you desire to be involved in having a hand in determining the outcome of the case. Certain challenges should be considered and expected.
Many Creditors are faced with Chapter 11 bankruptcy after months or even years of overdue invoices or bills unpaid by the Debtor, which can contribute to substantial financial distress. Serving on the Committee requires additional time obligations, traveling expenses, and other stresses that can further exacerbate the situation for Creditors.
If a Creditor wants to avoid the stress of the Ch.11 process altogether, other recovery options are available. Creditors can now easily and efficiently sell their bankruptcy claim for immediate cash. Read more about the XCLAIM marketplace and see if selling your claim is right for you.