A disclosure statement is part of the Chapter 11 process, where businesses and individuals with sophisticated financial situations are trying to reorganize their affairs. A plan of reorganization is the document where the debtor describes how the creditors are going to be treated. A disclosure statement is a document that contains financial information regarding the debtor that creditors are going to study to decide whether they want to accept or reject the plan. The amount of information required will vary from case to case. Usually the disclosure statement will require a balance sheet, an income statement, a description of why the debtor developed its financial problems, a description of significant events since the Chapter 11 case was filed, and projections showing how the debtor intends to be able to satisfy the obligations that it’s undertaking under the plan.
The first step in the process is for the bankruptcy court to consider whether the disclosure statement contains adequate information to enable a typical creditor to decide whether to accept or reject the plan. If the bankruptcy court decides that there’s not sufficient information, the court may tell the debtor to go back and make another try at giving more information before the debtor is allowed to disseminate the disclosure statement and the plan for balloting.
The disclosure statement phase is a very important phase in reorganization case because typically, once a disclosure statement is approved and is sent out for balloting, there’s always a very good chance that creditors are going to vote to accept the plan. Once the plan is accepted and confirmed by a court, it’s binding on all other creditors, whether they voted to accept or reject the plan or whether they’ve even voted at all.
