Bankruptcy: Chapter 13 And Chapter 11 Reorganizations

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Ch. 13 is voluntary bankruptcy instituted by individual who wants to propose plan to repay over time [installments], usually from 3-5 yrs

- fed courts only!

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1) Allows debtor to keep assets otherwise sold in a Chapter 7

2) Debts may be extended and reduced in amount

3) Plan approved only if meets “best interest of the creditors” test; each creditor must receive, in present value terms, at least as much as that creditor would receive if debtor were liquidated under Ch. 7

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Ch. 13 Limitations

1) Only individuals with regular income may file
2) Debt must have noncontingent, liquidated (clear as to the amount of debt) unsecured debts of less than $336,900 and noncontingent, liquidated secured debts of less than $1,010,650

[~$333k unsecured debt and $1million secured debt to qualify]

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If debts exceed these amounts, Chapter 11 or 7 required

1. Ch. 11 is more complex and requires creditors' approval of plan

2. Creditors holding a mortgage in debtor’s real property or an Article 9 security interest in debtor’s personal property and creditors holding a judicial lien (obtained through a court judgment against debtor) in the debtor’s property would be treated as secured creditors for these purposes, assuming value of debtor’s property is high enough to cover debts and cause them to be viewed as secured

3. A guarantee is not a debt (“I will pay if primary obligor doesn’t pay…”)

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Ch. 11 Reorganizations

Rehabilitate business by extending, reducing or modifying the debtor’s obligations

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1) Applies to businesses and individuals [for individuals; those w/unsecured debt exceeding $333k and secured debt exceeding $1 million]

2) Plan can only be approved if it meets “best interest of the creditors” test (same as Ch. 11)

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Ch. 11 Procedure

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1) Commenced by filing bankruptcy petition.

2) Generally, debtor may continue to operate in bankruptcy as “debtor in possession” without having to appoint a separate trustee. For Ch. 13 and 7, trustee always appointed.

Ch. 11 trustee may be appointed for cause including fraud, dishonesty, incompetence or gross mismanagement

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Ch. 11 Plan of Reorganization

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Ch. 11 has technical requirements as to how much creditors are paid under plan. Approval of plan by creditors is key and leads to substantial negotiations.

Confirmation of plan by bankruptcy judge vests title to property of the estate in debtor and binds debtor and all creditors to the terms of the plan. Under terms, certain debts may reduce in amount and pay over time.