Unsecured Creditors Desperately Fight For Pennies In Chapter 11 Bankruptcy

May 7th, 2010 by Reed Allmand

Traditionally, Chapter 11 bankruptcy left unsecured creditors with at least some equity in the reorganized company or part of the proceeds of a sale if nothing else.  However, due to the recession and the massive amounts of losses hitting debtor companies and creditors alike, many unsecured creditors are being left with nothing after a company exits bankruptcy. But many unsecured creditors are fighting for even the tiniest settlements in Chapter 11 bankruptcy.  The way that Chapter 11 bankruptcy works (and other bankruptcy chapters as well) is that unsecured creditors receive the least amount of priority in a case with secured creditors at the top of the repayment pyramid.  The reality is that during the boom, many companies became overleveraged with unsecured debt and ended up in Chapter 11 bankruptcy.  Normally, they would be able to discharge some of that unsecured debt but many unsecured creditors aren’t willing to take the hits and are pulling out all types of tactics to squeeze out some type of recovery during the Chapter 11 bankruptcy.

1. Many will object to “fast sales” of companies in Chapter 11 bankruptcy in attempt to slow down the bankruptcy process and extract concessions from the debtor-company.
2. Some unsecured creditors will object to a debtor-company’s bankruptcy financing in an attempt to frustrate the debtor and force them to the negotiating table.
3. And finally, one of the most common methods unsecured creditors are using to win concessions during Chapter 11 bankruptcy is challenging the bankruptcy restructuring plan.  Every effort of the debtor-company to present a Chapter 11 bankruptcy plan is often refuted by unsecured creditors in an attempt to extract some type of recovery settlement, even if the bankruptcy plans are sound. 

Many times these tactics are successful in forcing the debtor-company to allow unsecured creditors into the bankruptcy negotiations.  But it is only with the help of skilled and experienced bankruptcy attorneys that companies in Chapter 11 bankruptcy can successfully combat unsecured creditor tactics such as those outlined above.