A debtor’s goal in chapter 11 is to confirm a plan of reorganization. And a creditor’s goal is to maximize recovery under that plan. So, it is critical, of course, for creditors to scrutinize a proposed plan before voting. But an equally important document for creditors is the debtor’s disclosure statement.

The disclosure statement — which typically must be filed and approved by the bankruptcy court in order for a plan of reorganization to be approved — is a document that contains adequate information regarding a chapter 11 debtor’s assets, liabilities, and business affairs.

This information must be sufficient to allow a creditor to make an “informed judgment” on approving or objecting to debtor’s plan of reorganization. 11 U.S.C. § 1125(a).

Generally, a disclosure statement details how the debtor found itself in bankruptcy and the reasons why voting creditors should approve the proposed plan. It provides creditors with context regarding the plan, which will help stakeholders understand their anticipated recoveries and assist them in evaluating whether to approve the plan under the circumstances.

In preparing for this process, here are six things creditors need to know:

1. Once the disclosure statement is filed, creditors will have 28 days’ notice of the hearing on approval of the disclosure statement and to object. Fed. R. Bankr. P. 2002(b).
2. The disclosure statement will likely contain an alternative to its plan of reorganization, which often times includes dismissal of the chapter 11 (reorganization) and conversion to chapter 7 (liquidation). This will provide creditors the ability to pursue foreclosure and execute on pre-petition judgments.
3. The proposed chapter 11 plan must include a classification of claims and specify how each class will be treated under the plan. 11 U.S.C. § 1123. Creditors whose claims are listed as “impaired” are those who will be paid less than the full value of their claims under the plan. The “impaired class” votes on the plan via ballot. 11 U.S.C. § 1126.
4. Once a disclosure statement is approved, the plan proponent must mail to the US Trustee and all creditors and equity security holders: (1) the plan, or court-approved summary of the plan; (2) the disclosure statement approved by the court; (3) notice of the time within which to accept or reject the plan; and (4) any other information the court may direct. Fed. R. Bankr. P. 3017(d). All creditors and equity security holders entitled to vote on the plan must also be mailed: (1) notice of the time to file objections; (2) notice of the date and time for the confirmation hearing; and (3) a ballot for accepting/rejecting the plan. Id.
5. Ballots are collected and votes are tallied in favor of the plan, and the court will then hold a confirmation hearing to make a final determination on whether to confirm. 11 U.S.C. § 1128. Note: While the debtor can solicit acceptances of the plan after the disclosure statement is approved, creditors can simultaneously solicit rejections of the plan.
6. A plan proponent may modify the plan any time prior to confirmation, but the proposed modification must meet the requirements of chapter 11 and undergo the balloting and hearing process again. 11 U.S.C. § 1127(a).