Chapter 11 Recovery: What Creditors Actually Get

The Economics of Chapter 11 Reorganisation

Chapter 11 bankruptcy reorganisation is built on a simple premise: if a business is worth more as a going concern than its liquidation value, it should be reorganised rather than liquidated. The going-concern surplus — the additional value generated by keeping the business operating — can then be distributed among creditors through a repayment plan.

In practice, Chapter 11 is almost always better for creditors than Chapter 7 liquidation when the business has genuine going-concern value. Secured creditors typically recover 70-90% in reorganisation versus 60-85% in liquidation. Unsecured creditors frequently recover 10-50 cents on the dollar in reorganisation versus less than 10 cents in liquidation. The gap in unsecured recovery is often the decisive factor in whether creditors vote to support a plan.

However, Chapter 11 plans impose significant costs: professional and administrative fees typically consume 8-15% of all plan proceeds before any distribution to creditors. For small businesses, these fees can be the difference between a feasible plan and one that cannot be confirmed.

Model your Chapter 11 recovery

Enter your creditor claims, projected EBITDA, and plan length to see recovery by class, DSCR feasibility, and comparison against Chapter 7 liquidation.

Model Chapter 11 Recovery

How to Evaluate Whether Chapter 11 Makes Sense

1
Calculate your going-concern value vs. liquidation value
The threshold question in Chapter 11 is whether the business is worth more operating than liquidating. Going-concern value is typically estimated using an EBITDA multiple (industry-standard multiples range from 3-8x for most small and mid-size businesses). Liquidation value is the forced-sale proceeds from selling all assets individually. If going-concern value exceeds liquidation value by more than the cost of the Chapter 11 process (professional fees, time cost), reorganisation is economically justified.
2
Apply the absolute priority rule to model recovery by class
In Chapter 11, creditors must be paid according to the absolute priority rule: each senior class must receive full payment (or consent to less) before any junior class receives anything. The order is: (1) administrative expenses and professional fees, (2) priority unsecured claims including taxes and employee wages, (3) secured creditors up to collateral value, (4) general unsecured creditors, (5) subordinated debt, (6) equity. Model each class's recovery based on total plan proceeds and this waterfall.
3
Test plan feasibility with the DSCR calculation
Divide projected annual EBITDA by the required annual plan payment. If the result is 1.15 or higher, the plan meets the basic feasibility standard. If it is below 1.15, either increase EBITDA projections (with supporting evidence), reduce the plan payment by extending the term or cramming down secured debt, or accept that the business may not be able to successfully reorganise.
4
Apply the best-interest-of-creditors test
For a plan to be confirmed over creditor objections, every dissenting creditor must receive at least as much as they would in a Chapter 7 liquidation. Calculate the Chapter 7 liquidation recovery for each class using realistic forced-sale values and compare it to the proposed plan recovery. If any class would receive less under the plan than in Chapter 7, that class will likely vote no and potentially block confirmation.
5
Evaluate Subchapter V as a simplified alternative for small businesses
For businesses with total debt under $7.5 million (as of 2024), Subchapter V of Chapter 11 provides a streamlined reorganisation process with lower professional fees, faster timeline (typically 3-6 months to confirmation), and more flexible plan requirements. In Subchapter V, the business owner may retain equity without paying unsecured creditors in full, which is not permitted under standard Chapter 11.

Frequently Asked Questions

How long does Chapter 11 take for a small business?

Subchapter V (under $7.5M debt) cases typically confirm a plan within 3-6 months. Standard Chapter 11 cases take 12-24 months before plan confirmation, with the repayment plan then running 3-7 years. Pre-packaged plans (negotiated with creditors before filing) can be confirmed in 30-60 days. Professional fees in a small business Chapter 11 typically run $100,000-$500,000 — a significant cost that must be factored into the plan economics.

What is a cramdown and how does it work?

A cramdown is a plan confirmation mechanism that allows the court to confirm a plan over the objection of a dissenting creditor class if the plan meets certain legal requirements. For secured creditors, cramdown allows the court to reduce (or cram down) the secured claim to the actual collateral value, with the remainder treated as unsecured debt. This can significantly reduce plan payments for businesses with underwater collateral.

Can equity holders keep anything in Chapter 11?

Under standard Chapter 11, equity holders can retain value only if all creditor classes are paid in full or consent to less — which rarely happens in a distressed reorganisation. Under Subchapter V, the absolute priority rule is relaxed: a business owner can retain equity if the plan commits all projected disposable income over 3-5 years to creditors, even if creditors are not paid in full. This makes Subchapter V significantly more attractive for small business owners who want to retain their businesses.

What is the difference between reorganisation value and liquidation value?

Reorganisation value is the value of the reorganised business as a going concern — typically estimated as a multiple of forward EBITDA. Liquidation value is the forced-sale proceeds from selling all assets piecemeal. Reorganisation value exceeds liquidation value when the business has going-concern value: customer relationships, brand, workforce, and operational systems that generate value only when the business continues operating. The difference is the economic justification for Chapter 11 over Chapter 7.

Should I consider an Assignment for Benefit of Creditors instead of Chapter 11?

An ABC is a state-law alternative to bankruptcy that can achieve similar results with lower costs and faster timeline for businesses with cooperative creditors. ABCs work best when the business has clear assets, no contested claims, creditors willing to participate without court oversight, and a buyer identified for the business or its assets. ABCs do not provide the automatic stay of a bankruptcy filing, so they are less useful when creditors are actively pursuing collection actions.

Model your plan's recovery by creditor class

The calculator applies the absolute priority waterfall to your specific creditor claims and EBITDA projections, with DSCR feasibility testing and Chapter 7 comparison.