Bankruptcy Terms

Bankruptcy, like most areas of the law, is replete with jargon and “terms of art” that are opaque to outsiders. You’ll need to know at least a few of these terms for the Series 79 exam.

• • Plan of reorganization. A plan of reorganization is a plan for the debtor to restructure its debts in a way that allows it to continue operating and to pay off its creditors, at least in part. Formulating such a plan and having it approved is the ultimate goal of a debtor in a Chapter 11 proceeding. The bankruptcy code lists both mandatory and discretionary elements of a plan of reorganization. The plan must be filed within 120 days of the bankruptcy filing, but this deadline can be extended for good cause. In complex cases, it can take up to 18 months for a plan to be filed. To be effective, the plan must be confirmed by the bankruptcy court.
• » To be confirmed, the plan of reorganization must be accepted by at least one “impaired” class of creditors. (An impaired class is a class of creditors who will receive only partial repayment of what is owed to them.) Each impaired class that is to receive a distribution votes whether to accept or reject the plan. The plan is deemed accepted by a class if it is approved by creditors that hold at least two-thirds in amount and one-half in number of the accepted claims that vote. (If most creditors abstain from voting, a small minority of creditors could theoretically accept the plan.) This requirement means that if there are 100 creditors with claims of $1,000 each, and one creditor with a claim of $200,000, and all of them vote, the single large creditor cannot by itself approve the plan; even though the large creditor’s claim represents two-thirds of the total amount of claims, it is nowhere near half the total number of claims. At least 50 of the small creditors in the class must vote with the large creditor if the class is to accept the plan.
• » Unimpaired classes of credito