Section 1111(b) Election
A Section 1111(b) Election is a Chapter 11 election that can allow a qualifying class of secured claims to have the entire allowed claim treated as secured for plan-treatment purposes rather than accepting ordinary bifurcation under Section 506(a).
How it works
Section 1111(b) addresses secured-claim treatment in Chapter 11. When a qualifying election under Section 1111(b)(2) is made, the allowed claim is treated as secured to its full allowed amount notwithstanding Section 506(a). The election has statutory exclusions and procedural deadlines under Bankruptcy Rule 3014.
The election changes plan treatment of an undersecured claim
Section 1111(b)(2) provides that, after a valid election, the claim is secured to the extent the claim is allowed notwithstanding Section 506(a).
The election is made by the secured-creditor class
Section 1111(b)(1) contains voting thresholds for a class election. A single secured creditor is often placed in its own class and can control the election for that claim.
Rule 3014 creates the procedural deadline
The current Bankruptcy Rule generally requires the election before conclusion of the disclosure-statement hearing, subject to exceptions and court-set timing.
The election is unavailable in specified circumstances
Section 1111(b) limits elections where the secured interest is of inconsequential value and in specified sale situations.
Worked example: collateral appreciation trade-off
Assume a $50 million claim is secured by property worth $30 million today but potentially $45 million later. The lender must compare 1111(b) treatment with the plan’s payment stream and any deficiency recovery surrendered.
Why sophisticated lenders analyze the election early
The deadline can arrive before confirmation. A lender needs valuation, sale strategy and plan economics early enough to compare the election against ordinary bifurcated treatment.
Common mistakes
Saying the election increases collateral value; assuming every undersecured creditor can elect; ignoring Rule 3014 timing; and treating the election as automatically superior.
What it changes in recovery analysis
An 1111(b) election can trade a current unsecured deficiency position for stronger secured treatment tied to future plan payments and collateral value. That makes it especially sensitive to discount rates, amortization, balloon payments, collateral appreciation and default risk after emergence. A lender should compare the present value and downside protection of both paths, not simply ask which produces the larger nominal secured claim.
Example
A lender is owed $100 million but collateral is worth $60 million. Without the election, plan analysis may separate the claim into secured and deficiency components. A valid Section 1111(b) Election can instead change the secured-claim treatment for plan purposes.
Example
A lender is owed $100 million but collateral is worth $60 million. Without the election, plan analysis may separate the claim into secured and deficiency components. A valid Section 1111(b) Election can instead change the secured-claim treatment for plan purposes.
Professional note
The election is not automatically better for a lender. Its value depends on collateral value, appreciation potential, plan payment terms, present value, sale treatment and the creditor’s alternative unsecured recovery.
Related terms
- Section 363 Sale
A Section 363 Sale is a bankruptcy-court-approved sale of estate property under Bankruptcy Code Section 363, commonly used to sell substantial assets or an operating business outside the ordinary course of business during Chapter 11.
- Secured Claim
A Secured Claim is a bankruptcy claim secured by a lien or other qualifying interest in property, with the secured portion generally determined under Bankruptcy Code Section 506 by the value of the creditor's interest in the estate's interest in that property.
- Disclosure Statement
A Disclosure Statement is the Chapter 11 document that provides creditors and other voting stakeholders with information about the debtor, proposed plan, risks, recoveries and restructuring terms sufficient to satisfy the Bankruptcy Code's disclosure requirements for plan solicitation.
- Plan of Reorganization
A Plan of Reorganization is the Chapter 11 plan that sets the classification and treatment of claims and interests and establishes the transactions, distributions, governance and other steps through which the debtor will reorganize or otherwise resolve the bankruptcy case.
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