What Is the New Value Rule in Bankruptcy? A Simple Explanation for Business Owners

Understanding the New Value Rule in Chapter 11 Bankruptcy

What is the new value rule in bankruptcy, and how does it impact business owners filing under Chapter 11? If you’re a business owner considering bankruptcy—especially Chapter 11—you may have come across this legal concept. It can be confusing at first, but it plays an important role in how reorganization plans are approved and how ownership is handled when debt is overwhelming.

Understanding Chapter 11 Bankruptcy Basics

Before diving into the new value rule, it helps to understand what Chapter 11 bankruptcy is.

Chapter 11 is often used by businesses (and some high-asset individuals) to reorganize debt while continuing operations. Instead of liquidating everything like in Chapter 7, the filer creates a repayment plan to deal with creditors over time. If you’re unfamiliar with the structure and eligibility, BankruptcyAttorneys.net provides useful overviews of both Chapter 7 and Chapter 11 processes.

A key part of Chapter 11 is the “plan of reorganization.” This outlines how debts will be repaid, how much each creditor will receive, and who will own the business once the case is over.

This is where the new value rule comes into play.

What Is the New Value Rule?

The new value rule allows business owners to retain their interest in a company even when unsecured creditors are not being paid in full—but only if they contribute something new and valuable to the business.

In simpler terms:

• The owners want to keep the business after bankruptcy
• Creditors aren’t getting all their money back
• So, owners must put in new capital (like cash or assets) to justify keeping ownership

This contribution must be:

• New – It can’t come from existing assets
• Substantial – It must be meaningful in value
• In money or money’s worth – Tangible, not just promises
• Necessary for the business to move forward

This concept comes from a Supreme Court decision in Case v. Los Angeles Lumber Products (1939), which said that if owners want to keep equity despite not paying creditors in full, they must provide new value.

Why the New Value Rule Exists

In Chapter 11, creditors—especially unsecured ones—may lose part or all of what they’re owed. If the business owners could keep control without giving anything back, it would seem unfair.

The new value rule is designed to prevent that. It ensures that:

• Creditors aren’t cut out of the value of the business
• Owners must invest something new to keep ownership
• The bankruptcy process stays fair and balanced

It also gives judges a reason to approve reorganization plans, even when creditors object to owners keeping equity.

When Is the New Value Rule Used?

You’ll typically see the new value rule come up in:

• Small business Chapter 11 cases
• Cases where creditors are being “crammed down” (forced to accept less than full repayment)
• Plans where owners want to stay in control post-bankruptcy

Not every case will require it. If creditors are being paid in full, or if the court sees other justification, the rule may not apply.

But in contested cases, where creditors push back against the plan, the new value rule can be a key argument for owners trying to stay involved.

Examples of New Value Contributions

To satisfy the new value rule, business owners may contribute:

• Cash infusion from personal savings
• New equipment or assets needed to run the business
• Intellectual property rights (in rare cases, and only if easily valued)

It’s important that these contributions are real, measurable, and useful to the continued success of the business.

For instance, an owner might put in $50,000 in new capital to fund payroll or inventory as part of the reorganization plan. This helps the business stay afloat—and shows the court that the owner is making a good faith effort.

Is the New Value Rule Always Required?

No, the new value rule is not always mandatory. It’s more of a solution in complex or contested Chapter 11 cases, where the owners want to keep equity but can’t fully repay unsecured creditors.

In some cases:

• Creditors may agree to the plan voluntarily
• Owners may be contributing new value in other ways
• The court may approve a plan based on other legal standards

Still, when there’s pushback from creditors, courts often look for a clear new value contribution before allowing owners to retain control.

Why the New Value Rule in Bankruptcy Matters for Business Owners

The answer to what is the new value rule in bankruptcy lies in fairness and feasibility. If you’re a business owner hoping to keep control of your company during a Chapter 11 bankruptcy, you may be able to do so—but only by offering something new and valuable to support your plan. Whether it’s a capital investment, new assets, or operational tools, the contribution must be meaningful and measurable.

Understanding this rule ensures you’re better prepared to negotiate with creditors, propose a viable reorganization plan, and keep your business operational. When used correctly, the new value rule can be a powerful tool for long-term recovery and sustainability.

Explore How the New Value Rule Applies to Your Chapter 11 Strategy

Wondering what is the new value rule in bankruptcy and how it affects your reorganization plan? Legal Brand Marketing connects business owners with experienced bankruptcy attorneys who understand Chapter 11 intricacies. Our partners can help you assess whether a new value contribution is needed—and how to structure one that protects your interests.

You can also Contact us to learn more about how our legal marketing services can help you find trusted representation and navigate the bankruptcy process with clarity.