In a Chapter 11 , a Debtor may restricted its debts or the terms under which a Debtor in a Chapter 11 Bankruptcy will pay off its debts. This includes lien stripping in some cases. This is done primarily by motion and can reduce the amount of a secured creditor's lien to the value of available collateral securing the debt. In short, the debtor may force a secured creditor to release its lien by paying the secured creditor the current value of the collateral, rather than paying the full amount to the debtor owed the secured creditor. The balance would be treated as an unsecured claim.
However, under Bankruptcy Code section 1111(b) a secured creditor may elect to treat its entire claim as secured for the purpose of plan confirmation. By doing so, the creditors total claim is treated as a single secured claims for purpose of plan distribution and plan voting. The entire claim rather than the value of the collateral becomes the amount of the under-secured creditors allowed secured claim.
This alters the plan confirmation by forcing the Debtor to provide the creditor with property or payments totaling at least the value of the creditors interest in the debtors interest in the collateral. In short, the creditor must receive payments over the life of the plan that total the entire claim, but the present value of the payments only needs to equal the value of the security.
Because of the complex rules of a Chapter 11 business reorganization, it is important to get competent legal advise. For more information about a Chapter 11 Bankruptcy, please contact Christopher P. Walker at 714-639-1990.