Chapter 11 plans often include various releases, some favoring the debtor and others benefiting nondebtor third parties. While creditors are bound by a Chapter 11 discharge, they have options regarding third-party releases. Understanding these releases is crucial for creditors to protect their interests. The Chapter 11 discharge releases the debtor from most past debts, providing a fresh start. Creditors cannot opt out of this discharge but must file a proof of claim for any pre-petition or post-petition claims before the applicable bar dates to ensure their claims are treated under the plan.

Third-party releases benefit nondebtor parties and require creditor consent. Courts agree that third-party releases are binding on consenting creditors but differ on what constitutes consent. Creditors should review the plan’s release language to understand who is being released and for what claims. Additionally, creditors must carefully follow the procedures for opting out or opting in to third-party releases. This involves submitting a ballot or release form by the deadline. Failure to do so may result in the default option, typically granting the release, being applied.

Releases in Chapter 11 plans are complex. Creditors should retain experienced bankruptcy counsel to protect their rights, ensure claims are preserved, and evaluate whether to consent to third-party releases. By understanding the implications of these releases and following the correct procedures, creditors can make informed decisions that best serve their interests in the bankruptcy process. Read full article here.