What Is A Chapter 11 Bankruptcy Creditor’s Committee?
One aspect of Chapter 11 bankruptcy which is unique and not found with other forms of bankruptcy is the creditors committee. A creditors committee will have a large hand in the debtor’s reorganization plan, and what the debtor will or will not have to pay through the Chapter 11 reorganization plan.
Why is a Creditors Committee Needed?
To understand why there is a creditor committee, you need to understand how payment of debts in a Chapter 11 bankruptcy works. There is a hierarchy of priority of creditor claims in Chapter 11. At the highest level—that is, most important–are secured creditors, such as mortgages, cars, or other loans or debts that have a valid lien on property that secures the debt.
After secured creditors come creditors that are related to the Chapter 11 plan itself—for example, lenders who may give money to assist the business in the reorganization , payment of attorneys’ fees, trustee fees or other expenses. After that are “priority claims,” and lastly, unsecured, non-priority debts, such as common medical expenses or credit card debt.
Money Flows Down
There is an unbreakable rule in Chapter 11 bankruptcy: creditors in “higher” positions need to be paid off first before creditors in lower positions can be paid. So, if a debtor can pay secured creditors and administrative expenses but nothing else, no other category of creditor can be paid. As you can imagine, in most cases, by the time the debtor pays all of the creditors in higher positions, unsecured creditors get nothing, or pennies on the dollar.
Those unsecured creditors often get so little, it would make no sense for them to hire attorneys or staff to represent them in the bankruptcy. So, the trustee can appoint a creditors committee to represent the interests of the unsecured creditors. This ensures they get representation without having to pay money for representation when what they receive may be little or nothing.
What the Committee Does
The committee usually will hire an attorney to represent the interests of all unsecured creditors. The debtor is responsible for paying for the attorney, as well as for the travel costs for any committee members should they have to appear personally at meetings or hearings.
These committees’ interests are in trying to show that the debtor has enough income or assets to “flow down” to the unsecured creditors, or to show that debts are, for some reason, not dischargeable (such as fraud). In some cases, the committee may suggest the company be liquidated as opposed to reorganized, when liquidation would result in the unsecured creditors getting more money than they would in reorganization (as is often the case).
The committee can even negotiate with higher creditors, to get them to waive certain debts, which benefits unsecured creditors, as more money will be available to “flow down” to them.