Chapter 11 Plan Financials: Projections, Feasibility, Liquidation Analysis and Valuation
/A Chapter 11 plan is a legal document built on financial tests. The court confirms it only if the numbers show the company can perform and that creditors are at least as well off as in a liquidation.
How do I prepare a liquidation analysis for a Chapter 11 plan?
Estimate what creditors would receive if the company were liquidated under Chapter 7. Value each asset at what a forced sale would realistically bring, deduct secured claims and the costs of liquidating, then run the remainder through the priority order. Compare each class's result with what the plan pays.
The test it supports is the "best interests" test: each holder in an impaired class that does not accept the plan must receive at least what it would in a Chapter 7 liquidation (11 U.S.C. § 1129(a)(7)).
Worked example (illustrative figures)
| Book value | Liquidation recovery | Liquidation value | |
|---|---|---|---|
| Cash | 150,000 | 100% | 150,000 |
| Receivables | 900,000 | 70% | 630,000 |
| Inventory | 1,200,000 | 35% | 420,000 |
| Equipment | 800,000 | 30% | 240,000 |
| Gross proceeds | 1,440,000 | ||
| Chapter 7 trustee and liquidation costs | (160,000) | ||
| Secured lender | (900,000) | ||
| Administrative and priority claims | (220,000) | ||
| Left for unsecured creditors | 160,000 | ||
| Unsecured claims | 2,000,000 | ||
| Liquidation recovery | 8% |
If the plan pays unsecured creditors 25%, it passes the test with room to spare.
What does plan feasibility mean?
The court must find that confirmation is not likely to be followed by liquidation or another reorganization (§ 1129(a)(11)). In practice that means projections, usually covering the plan term, that show the company can pay its plan obligations, keep enough cash to operate and survive a reasonable downside.
Projections that hold up:
- Start from actual results in the case, not pre-filing hopes.
- Tie revenue to customers, volumes and prices the company can explain.
- Include plan payments, taxes, capital spending and a minimum cash level.
- Show a downside case, and what management would do in it.
How is projected disposable income calculated in Subchapter V?
When creditors do not accept a Subchapter V plan, it can still be confirmed if, among other requirements, it commits the debtor's projected disposable income for three years (up to five if the court sets a longer period), or distributes property of at least that value (§ 1191(b)–(d)). Disposable income is income the business receives, less what is reasonably necessary to keep operating and to pay certain other obligations. The projections must show those amounts year by year.
Claims reconciliation
The plan can only pay what the claims add up to. After the claims bar date, each filed proof of claim is compared with the company's records and schedules. Duplicates, amended claims and overstated amounts are identified for counsel to object to. The reconciled totals drive the recoveries in the plan and in the liquidation analysis.
How is a business valued in Chapter 11?
The usual methods are discounted cash flow, comparable companies and comparable transactions, cross-checked against liquidation value. Valuation matters for the plan, for disputes over who keeps the equity, and for any sale. The projections behind the valuation must be the same ones behind feasibility.
Checklist
- Projections built from actual case results, with a downside case
- Liquidation analysis with asset-by-asset recovery assumptions explained
- Claims reconciled to the company's records after the bar date
- Plan payments, taxes and minimum cash in the projections
- Subchapter V: projected disposable income shown for the commitment period
Questions owners ask
Who prepares the disclosure statement? Counsel. The financial sections (projections, liquidation analysis, the company's financial history) come from the financial advisor.
What if creditors object to the projections? The court weighs the evidence. Projections tied to actual results and explained assumptions are much harder to attack.
Related: Chapter 11 financial advisor or CRO · Selling a business in Chapter 11
General information, not legal advice.