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Understanding the role of a creditors committee

| Apr 14, 2019 | Chapter 11 |

For businesses in Hackettstown who are experiencing financial difficulties, a Chapter 11 bankruptcy offers the chance to halt the collection activities that have been driving it deeper into debt and formulate a strategy that will allow it to remain open. When discussing Chapter 11 cases, much attention is paid to the debtor in possession and the court-appointed trustee (if there is one). Yet while everyone assumes that their presence is recognized in a bankruptcy case, few details are often given about the creditors involved. Who looks out for their interests? 

The answer to that question depends on the unique circumstances of each individual case. If a debtor filing for Chapter 11 bankruptcy only has a handful of creditors, then dealings between the two sides can often be easily managed. Yet when several different creditors are involved, the court may appoint a creditors committee. 

When a debtor submits its reorganization plan as part of a Chapter 11 case, it must detail its plans to repay its creditors. That may include modifying its contracts with certain creditors or even negotiating to settle debts for less than what is owed. The creditors must sign off on this plan. A creditors committee will represent the interest of the collective group during this process. Per Section 1102 of the U.S. Bankruptcy Code, the creditors who hold the largest seven claims against the debtor are typically chosen to serve on the committee. Additional committees can be appointed if the court deems it necessary. 

The website for the Federal Judiciary shows that a creditors committee will monitor the conduct of the debtor during its reorganization. If the members of the committee wish, they themselves may hire their own attorney to help streamline this task.