Chapter 11 Plan for a Small Business: 6 Classes of Creditors and How Each Votes

The vote in a Chapter 11 case is counted class by class, which means whoever draws the classes has cast something close to a first ballot before any creditor receives one. Section 1122 allows a claim into a class only if it is "substantially similar" to the other claims there, and inside that limit the plan decides who sits beside whom. The Code prescribes no number. Six is a plausible count for a small operating company with a bank, a van lender, a payroll, vendors, a funder holding a merchant cash advance, and an owner who once lent the company money, and six is the seating chart used below.

Some creditors are never seated at all. Section 1123(a)(1) excludes administrative expenses and priority tax claims from classification, and section 1129(a)(9) writes their treatment into the statute: administrative claims in cash on the effective date, priority taxes in regular cash installments spread over no more than five years from the date relief was ordered. Those creditors cast no ballot.

1. The Secured Lender Votes Its Claim Against the Value of Its Collateral

A plan can give the bank that holds the equipment lien a class of its own, and a class of one votes the way one loan officer decides. The bank, if we are exact about it, does not vote its collateral. It votes its claim, and section 506(a) measures that claim against the collateral before any ballot is counted.

Suppose the bank is owed $450,000 against equipment a court values at $300,000. Under section 506(a) the claim is secured to the extent of that value and unsecured for the remainder, so the bank votes $300,000 in its secured class and carries the other $150,000 across the room into the general unsecured class, where it votes a second time.

The bank may refuse the split. Section 1111(b) lets a class elect, by the same two-thirds of dollars and a head-count majority used for voting, to have the whole allowed claim treated as secured, and a class containing one bank reaches both thresholds by agreeing with itself. The election surrenders the $150,000 ballot among unsecured creditors. What the bank receives in exchange is a floor: a plan confirmed over its objection must then pay deferred cash totaling at least the full $450,000, with a present value of at least the $300,000 the equipment is worth. The election is unavailable where the lender's interest is of inconsequential value, or where the lender has recourse and the property is being sold (a limitation that matters more in a liquidation, though not only there).

If the secured class rejects, confirmation passes to section 1129(b)(2)(A) and to a valuation hearing the estate pays for. The lien stays on the equipment either way. That part was never on the ballot.

2. A Lender Whose Loan Is Reinstated Never Receives a Ballot

Section 1124 describes the creditor a plan leaves alone. A class is unimpaired if the plan leaves the holder's legal, equitable, and contractual rights unaltered, or if it cures the defaults, reinstates the original maturity, compensates the holder for reasonable reliance on an acceleration clause, and does not otherwise alter the contract. Section 1126(f) then treats that class as having accepted, and no one solicits its vote.

The finance company holding the note on two delivery vans is the usual candidate. Its missed payments are cured, its schedule resumes, and it spends the case being paid by a debtor who never asks its opinion.

3. Employees Holding Priority Claims Vote on When They Are Paid, Not Whether

Wages, salaries, commissions, vacation, severance and sick pay earned within 180 days before the petition, or before the business stopped operating if that came first, receive fourth priority under section 507(a)(4), capped at $17,150 per individual for cases filed on or after April 1, 2025. Amounts above the cap fall into the general unsecured class.

The vote of this class does something unusual. Under section 1129(a)(9)(B), if the class accepts, the plan may pay each holder in deferred cash payments whose value as of the effective date equals the allowed claim; if the class rejects, every holder must be paid in cash on the effective date. Rejection costs the voter nothing it is owed. It moves the calendar, and for a company planning to spread payroll arrears over a year, the calendar is the whole of the problem.

4. General Unsecured Creditors Are Counted Twice, Once by Dollars and Once by Heads

"[A]t least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors ... that have accepted or rejected such plan." That is the test in section 1126(c), and the last clause carries more weight than the fractions do: only creditors who return a ballot are counted, so a vendor who throws the package away has neither helped nor hurt.

Suppose twenty creditors in the class vote, holding $520,000 among them, and a single merchant cash advance funder holds $400,000 of that total. Two-thirds of $520,000 is roughly $346,667. If the funder votes no, the yes votes can hold at most $120,000, and the class rejects regardless of how many vendors approve. If the funder votes yes but only nine of the twenty agree, the class still rejects, because nine is not more than half of twenty. A plan must satisfy the funder and ten others, a coalition that looks small on paper and is not small in the room.

The class holds tools on both sides. Section 1126(e) permits the court, on request and after a hearing, to designate a creditor whose vote "was not in good faith," and a designated vote is removed from both counts. A funder whose claim is disputed (perhaps because the debtor contends the agreement was a loan rather than a purchase of receivables, a question courts decide on the documents in front of them) may find its vote turning on Bankruptcy Rule 3018(a)(4), under which the court may temporarily allow a claim in an amount it considers proper for voting. The dispute over the claim becomes, for a few weeks, a dispute over the ballot, and the side that prevails at that hearing may have decided the class, even though the claim objection itself can run on after confirmation and arrive at a different number, a result the rules permit and nobody much enjoys explaining to a client.

A class that receives nothing under the plan is deemed to reject under section 1126(g). It is also the class in which the absolute priority rule does its work, and the owner's equity is what that rule measures.

Two creditors holding the same kind of claim may vote in the same class and experience entirely different cases.

5. The Convenience Class Is Drawn for the Clerk

Section 1122(b) permits a separate class "consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience." A plan might, for example, offer to pay in full every claim of $1,000 or less, and let a creditor holding $1,400 reduce its claim to $1,000 to join.

The class tends to be paid in cash and early, and a class left unimpaired is presumed to accept. It is the only class in the Code whose purpose is postage.

6. The Owner's Own Loan Votes, and the Court Declines to Count It Where It Matters

An owner who lent the company money holds a claim like any other lender, and the plan may classify it. The claim is also an insider claim, and section 1129(a)(10) requires that, if any class is impaired, at least one impaired class accept the plan "determined without including any acceptance of the plan by any insider." The owner may vote yes. The yes does not open the door to cramdown.

Equity is a different ballot. A class of interests votes under section 1126(d) by amount only, two-thirds of the interests voting, with no count of heads, and if the plan leaves shareholders nothing the class is deemed to reject. The owner as lender and the owner as shareholder are the same person. The Code insists on treating them as two, and it is right to.

Where the Classes Have Not Yet Been Drawn

A six-class plan is a negotiation held in six rooms at once, at the estate's expense. Some owners reach the same creditors earlier, one room at a time, without a petition. Delancey Street reviews merchant cash advance and other business debt without charge and in confidence to see whether a settlement outside court is available. It drafts no plans and appears in no bankruptcy court; not a law firm, it brings in independently licensed counsel once a question turns legal. The limit of that offer deserves the same plain statement. A company facing foreclosure by its secured lender, payroll arrears it cannot meet, and a funder that will not negotiate needs bankruptcy counsel who can draw classes, and a settlement firm is the wrong first call.

The ballots arrive last in any Chapter 11 case. By then the seating chart has done most of the arguing.