Structured dismissals have emerged as a viable alternative for Chapter 11 debtors seeking to exit bankruptcy without the high costs and complexities associated with confirming a Chapter 11 plan or converting to Chapter 7. This approach is particularly useful when a debtor’s assets have been sold, and the remaining funds are insufficient to justify a full plan process but can still provide some distribution to creditors. Unlike a straight dismissal, a structured dismissal offers a more controlled exit, ensuring that the interests of the debtor, creditors, and third parties are adequately protected.

A structured dismissal is typically formalized through a court order that may include provisions similar to those found in a Chapter 11 plan. These provisions can encompass processes for claims reconciliation, potential distributions to creditors, and releases or exculpations for the debtor and certain third parties. Additionally, the order may ensure the continued effectiveness of prior bankruptcy court orders, including any sale orders. Creditors must carefully review these provisions to understand how the structured dismissal will impact their rights and interests.

One critical aspect of structured dismissals is the adherence to the priority scheme outlined in the Bankruptcy Code. The Supreme Court has ruled that distributions made under a structured dismissal cannot violate this priority scheme, meaning unsecured creditors cannot receive payments before senior creditors are fully compensated. Despite this, some unsecured creditors may still prefer a structured dismissal over a Chapter 7 conversion, as it can eliminate potential liabilities and provide quicker, albeit partial, payments to administrative or priority claim holders. Read full article here.