Hidden Creditor Costs of the Ch.11 Process and How they Hurt Creditor Recovery
When a Creditor receives notice of Chapter 11 Bankruptcy, the chain of events that follow are not only complicated, lengthy, and unpredictable, but they can also be unexpectedly expensive. While the legal process may be relatively straightforward and potentially beneficial for the Debtor who is hoping to re-emerge as a healthy and financially viable business once the case is concluded, it instigates a number of unforeseen obstacles and costs for the Creditors involved.
After already being put into a precarious financial position due to unpaid invoices or bills accrued by the Debtor, Creditors now have to endure the litigations of the Ch.11 process and all of the procedural complexities that come with it. Unfortunately, there is no way of knowing for certain if the process will result in a full recovery of their losses.
For Creditors, Ch.11 Bankruptcy is a waiting game and a vastly extensive one. Although all Ch.11 Bankruptcies follow the same fundamental procedures, each individual case has its own nuances that can affect the length, timeline, and the likelihood of Creditor recovery. Some Ch.11 cases can conclude after just six months, while others can take up to two years before a solution is settled upon. Furthermore, upon confirmation of the Debtor’s Plan of Reorganization, it can still take months for Creditors to receive their payout.
The wait might be worth it for Secured Creditors with Bankruptcy Claims supported by collateral or a contract. These Creditors are guaranteed payment at the conclusion of the case. However, for Unsecured Creditors who do not hold contractual obligation or collateral, there is no guarantee in waiting it out.
Unsecured Creditors risk the possibility of their Bankruptcy Claims being discharged or depreciated in value. It is not uncommon for the Debtor’s bankruptcy estate to run out of available funds after paying the Secured Creditors and other Priority Claims in full. This means the remaining Unsecured Creditors could receive partial payment, no payment at all, or payment in another form, such as promissory notes or equity in the Debtor’s reorganized business.
The unpredictable nature of Ch.11 Bankruptcy can result in a substantial amount of money out of the Creditor’s pocket, plus time and stress put into the process—all without any guarantee that they will receive remediation. For this reason, it is important for a Creditor to evaluate the risks that come with the Ch.11 process to be able to make an informed decision regarding their best course of action.
The Chapter 11 Process
In the early stages of Chapter 11 Bankruptcy, the question on every Creditor’s mind is: how and when will I get paid back the money I am owed? In order to assert their right to receive payment from the Debtor’s bankruptcy estate, a Creditor is required to file a Proof of Claim that discloses the value of their Claim and provides the necessary information to back it up.
After Creditors file their Proofs of Claim with the Bankruptcy Court, the Debtor is given time to review the Claims, settle any disputes regarding the Claims and then begin formulating a Plan of Reorganization that outlines how they are going to repay their debts and reorganize their assets. The Debtor’s Plan of Reorganization is then submitted to the Bankruptcy Court and Creditors to negotiate the terms and ultimately, determine whether it is approved or rejected.
A Creditor’s journey to recovery is subject to change throughout the Ch.11 process. Bankruptcy Claims can be objected against by the Debtor, disallowed by the Court, reduced in value or deemed invalid. If a Creditor’s Claim is allowed, it is then categorized into a class, which dictates the priority levels and order in which the Creditors will be paid. Creditors with low priority Bankruptcy Claims are less likely to receive a payout of full value upon conclusion of the case.
Apart from the procedural dependencies that can affect a Creditor’s likelihood of recovery, there are other factors that can present a risk to achieving a positive outcome. Waiting it out could potentially accumulate more expenses than a Creditor can afford, and sometimes with a lowered claim repayment. Due to the uncertainty of the Ch.11 process, there is no way to calculate the cost, time, and stress that it will cause.
The first risk and common mistake that a Creditor can make is filing the Proof of Claim incorrectly, late, or not providing sufficient documentation to support their Claim. This can lead to more time spent filing an amendment and added expenses.
While it is possible for a Creditor to file their Claim on their own, it can not only pose a major risk to the allowance of their Claim, but any error can cause further delays in the process. It is highly recommended to seek counsel from a legal or financial advisor to ensure that there are no mistakes made when filing.
Another common issue that Creditors encounter during the pendency of the Ch.11 process is a lack of communication with the Bankruptcy Court. An experienced bankruptcy representative understands the language and procedures and can not only help accurately submit a Proof of Claim, but also handle communications with the Bankruptcy Court to ensure that the Creditor is kept up to date throughout the Ch.11 process.
Creditor representation can cost anywhere from $125 to $350 per hour. Though this is a hefty cost, it is a smart move to make early on to prevent problems down the line. However, it is important for a Creditor to keep in mind that the length of the Ch.11 process remains uncertain, which could potentially rack up a considerable amount of hours.
Travel Fees and Time
Creditor involvement is a necessary aspect of the Ch.11 process to determine the outcome. From the petition date to the confirmation of the Debtor’s Plan for Reorganization, Creditors reserve the right to object, approve or reject the Debtor’s proposed terms.
Creditors can accrue a significant amount of traveling fees depending on the level of involvement they have in the Ch.11 case. Throughout the process, there are several court-ordered hearings that are held to resolve objections and settle decisions regarding the Debtor’s Plan of Reorganization.
If a Creditor is based far from the location of the court in which the Debtor has filed their Bankruptcy Petition, the cost of traveling to and from could start to add up. Additionally, traveling and participating in case activities eats up valuable time that a Creditor could spend maintaining the financial health of their own business.
Conflicting Interests with Other Creditors
Depending on the complexity of the Ch.11 case, there could potentially be hundreds of other Creditors involved in the process – all with differing privileges, opinions, and interests. It is common for there to be discrepancies and conflict amongst the Creditors when negotiating the terms of the Debtor's Plan of Reorganization. Sometimes, these conflicting interests can further disadvantage those with a low priority, leaving unsecured creditors in the dark when it comes to repayment terms and representation in the Debtor's Plan.
Conflicting interests are another factor for Creditors to consider when navigating the Ch.11 process. It is an additional risk that could add months to the timeline as other Creditors file objections or reject the Plan.
The outcome of Chapter 11 Bankruptcy for Creditors is uncertain, which means there are an abundance of unexpected expenses and obligations that can arise. Relying solely on the court process can result in a substantial amount of time and money spent without the guarantee that it will be worth it in the end.
For Creditors, there is a way to alleviate some of the risks that come with waiting to see how the process will play out. Creditors can simultaneously list their Bankruptcy Claim to be purchased by an interested Buyer in order to earn immediate cash. Exploring the option of selling their Claim is an easy way for Creditors to skip the line to recovery, save valuable time, and avoid the hidden costs.