Legal Definitions - feasibility standard

The feasibility standard is a critical requirement in U.S. bankruptcy law, specifically for businesses or individuals seeking to reorganize their finances under Chapter 11 of the Bankruptcy Code. Before a bankruptcy court will approve a proposed reorganization plan, it must determine that the plan is realistic, practical, and has a reasonable chance of succeeding. This means the plan must demonstrate that the debtor can realistically implement its terms, generate sufficient income, and ultimately repay its debts according to the plan's provisions, without needing further restructuring in the near future.

Here are some examples to illustrate the feasibility standard:

• Scenario: A Regional Retail Chain

  A regional clothing store chain, "Style Trends," files for Chapter 11 bankruptcy due to declining sales and an inability to adapt to online competition. Their proposed reorganization plan includes closing several underperforming physical stores, investing heavily in a new e-commerce platform, renegotiating leases for remaining locations, and securing a modest loan to fund the digital transformation. The bankruptcy court would apply the feasibility standard by examining whether the projected revenue from the new e-commerce platform is realistic, if the cost savings from store closures are accurately estimated, and if the new loan is sufficient and sustainable given the company's financial history. If the court finds that the online sales projections are overly optimistic or that the company lacks a credible strategy to compete digitally, the plan might fail the feasibility standard.

• Scenario: A Manufacturing Company

  "Precision Parts Inc.," a manufacturer of specialized components, enters Chapter 11 after a major client shifted its business elsewhere, leaving Precision Parts with significant debt and excess capacity. Their reorganization plan proposes selling off an outdated factory, investing in new machinery to produce a different, high-demand product line, and deferring payments on some long-term debts for three years while they retool and secure new contracts. The court would assess the feasibility of this plan by scrutinizing the market demand for the new product line, the likelihood of securing new customers, the realistic timeline and cost for retooling, and whether the sale of the factory will generate the projected funds. If the court believes the company's market analysis for the new product is weak or that the costs of the transition are underestimated, the plan would likely be deemed unfeasible.

• Scenario: A Hospitality Group

  "Grand Stay Hotels," a small chain of boutique hotels, files for Chapter 11 after struggling with low occupancy rates and high maintenance costs. Their reorganization plan involves renovating two of their properties to attract a higher-paying clientele, selling off a third property that is consistently unprofitable, and restructuring their existing mortgage loans with extended repayment periods. To meet the feasibility standard, the court would evaluate the projected increase in revenue from the renovations, the realistic market value and sale timeline for the property being sold, and whether the restructured loan terms are truly sustainable for the company's anticipated cash flow. If the court determines that the renovation costs are too high for the expected return, or that the market for selling the unprofitable property is too weak, the plan might not be approved.