Debt Limits Sometime Require a Chapter 11

It is unusual for a consumer filing for reorganization under the bankruptcy code to resort to Chapter 11. There is a good reason for this. Chapter 13, involved as it may be with the accounting for property and making monthly payments to a Chapter 13 trustee, is not nearly as convoluted and costly as a Chapter 11. 

Michael Vick and Wayne Newton, among many others, filed Chapter 11 for one simple reason. They had too much debt to qualify for Chapter 13. 

Chapter 13 is defined as an “Adjustment of Debts for Individuals with Regular Income.” Both Michael Vick and Wayne Newton were individuals; both presumably had regular income at some point. But in order to qualify for Chapter 13, a debtor’s secured debt may not exceed $1,149,525 nor may unsecured debt exceed $383,175 (as of the date of this writing). If a debtor needs to reorganize in bankruptcy, and their debts exceed either of those limits, then the only “game in town” left for the debtor is Chapter 11. Few individuals elect to go the Chapter 11 route due to the plethora of additional challenges involved. 

First of all, the filing fee just to walk into court and hand them your petition is currently $1,717. This, of course, does not include fees for attorneys, appraisers, accountants, real estate agents, and other professionals which will often have to be involved to develop a successful Chapter 11 case. The debtor must file a Disclosure Statement pursuant to a Plan of Reorganization, both of which documents are much more detailed and complicated than that required by Chapter 13. 

In addition, there is a quarterly fee that must be paid to the Executive Office of the United States Trustee (UST) for the privilege of having the UST examine and critique every detail of the case. Part of this examination includes the UST review of the monthly reports that must be filed in the case as directed by the Operating Instructions and Reporting Requirements (OIRR) issued by the UST, which are about 3/8” thick. The OIRR includes such directions as the requirement to close out all bank accounts and reopen them as new accounts with your bankruptcy information noted on the checks. 

Other features of Chapter 11 include the need to immediately file for what are called “first day orders” so that the attorney for the debtor can be approved as counsel to the debtor and in some cases just to get the right to use the money the debtor already has in the bank for ongoing operations (called “cash collateral orders”) depending on the debtor’s debt configuration. Additionally, debtors must solicit approval from the creditors who literally get a ballot to vote on the debtor’s plan. 

However, it is not all “doom and gloom.” There are many advantages to Chapter 11 which one does not find in the others chapters. One is that the debtor becomes what is called a “debtor-in-possession” (DIP), which means that no trustee is appointed to administer the case. While the UST certainly has an oversight function, as long as the debtor is honest and competent, then the debtor gets to retain control over the operation. If the DIP is either not honest or competent, then the DIP runs the risk of a Chapter 11 trustee being appointed to take control of everything. 

One also finds more flexibility, generally, in Chapter 11. While the OIRR is the template for how the DIP must operate, if common sense dictates that some other approach should be taken, then the court will often allow it, sometimes with the agreement of the UST, and sometimes not. 

Chapter 11 is rarely anyone’s first choice when considering a bankruptcy filing to obtain protection from one’s creditors but sometimes it is the best if not the only choice. Our office has handled a number of such cases successfully, but they are always a challenge and require the greatest of attention to detail. Many seasoned consumer bankruptcy professionals will not attempt to navigate the choppy waters of Chapter 11, and for good reason.