Task Force Studying Individual Chapter 11 Filings

Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...

April 18 — Individuals account for between a quarter and a third of all Chapter 11 bankruptcy cases filed, according to a preliminary report of the American Bankruptcy Institute's Task Force on Individual Chapter 11.

Chapter 11 bankruptcy is for businesses or individuals whose debts exceed the statutory thresholds for Chapter 13.

Individual Chapter 11 filings are in a “no man's land” and are “incredibly different than business Chapter 11s,” C.R. “Chip” Bowles, Jr., of Bingham, Greenbaum Doll LLP, Louisville, Ky., said at an April 16 panel discussing the preliminary report at the ABI's Annual Spring Meeting in Washington, D.C. Bowles is a contributing author of .

There is a lot of empirical research about individuals who file under Chapter 7 in which nonexempt assets are liquidated and the proceeds are distributed to creditors, and under Chapter 13, which allows individuals receiving regular income to obtain debt relief while retaining their property by proposing a plan that uses future income to repay a portion of their debts over a three to five year period.

There is also empirical research about corporations that file under Chapter 11, but there is little known about individuals who filed under Chapter 11.

The ABI's study is intended to fill that gap, according to the report. Whether those individuals belong in Chapter 11 or should have filed under Chapters 7 or 13 is a fundamental question that motivated the study.

Work In Progress

“The preliminary report is a work in progress,” Prof. Margaret Howard, reporter of the Task Force and Law Alumni Association Professor of Law at Washington and Lee University School of Law, Lexington, Va., told Bloomberg BNA April 16 after the report's unveiling. Howard is a contributing author of .

The report is still evolving and will be expanded and edited during the summer for the final report to be released later this year, according to Howard.

The concern was that individuals could be pushed into Chapter 11 and forced to make payments out of future income. The results of the study, however, suggest that this problem is more “theoretical than actual” because the researchers didn't find a single case filed in either 2010 or 2013 in which the debtor was involuntarily pushed into Chapter 11 and in which a plan was ultimately confirmed.

Is Chapter 11 the Right Fit?

The study found the question of whether these individuals belong in Chapter 13 to be a harder question to answer.

According to the report, modestly raising the Chapter 13 debt limits wouldn't cause a sharp decline in the number of individual Chapter 11 cases filed. As many as 46 percent of the Chapter 11 debtors in the 2013 sample had liabilities below Chapter 13 debt limits and increasing the debt limits by 50 percent “wouldn't radically change this figure,” the study said.

Chapter 13 might not be a good fit for those debtors, the report said, as most individual Chapter 11 debtors are different from the “typical” Chapter 13 debtor. The Chapter 11 debtors have higher incomes, substantially more assets and more debt, and they are more likely to operate a business, the report said.

They are also more likely to have complicated cases and have difficulty complying with the tight deadlines imposed by Chapter 13. For example, the report notes that Chapter 13 debtors must file a plan within 14 days of filing their petition, but median time from petition to first plan in the study's sample was about six months.

Chapter 11 debtors also have substantial real estate interests and may need a plan of reorganization that extends beyond the typical five years in a Chapter 13 plan, according to the report.

Source of Data

As a source of data, the study began its empirical analysis with PACER data, Howard explained. PACER case reports were collected for all bankruptcy cases filed in 78 of the 94 judicial districts in the U.S. Those are the jurisdictions that granted waivers allowing the Task Force to conduct the research.

According to the report, these jurisdictions accounted for 91 percent of all bankruptcy filings, and approximately 93 percent of all Chapter 11 filings in the U.S. in 2010 and 2013.

The study also used as a second source of data, 109 cases randomly selected that were filed in 2010, and 114 cases that were filed in 2013, according to Howard. These cases were hand coded for a variety of things not covered in the data, she said.

Looking at the data, Prof. Richard Hynes, of the University of Virginia School of Law, Charlottesville, Va., said that business debt is the primary nature of the debt in individual Chapter 11 cases. When analyzing the data, Hynes said that the study considered a “success” to be the “absence of failure or dismissal or conversion out of Chapter 11.”

Further Study

Hynes and Prof. Anne Lawton of Michigan State University College of Law, East Lansing, Mich., both noted that there are potentially several other areas for study including whether the absolute priority rule affects the filing rate.

Chapter 11 debtors generally must adhere to the absolute priority rule, which says that a class of creditors that hasn't accepted the debtor's plan can't be forced to accept less than the full amount of their claim while any junior creditor or equity holder receives any property or retains any interest in the debtor under the plan.

There is no absolute priority rule in Chapter 13, but more courts have held the absolute priority rule applies in Chapter 11 regardless of whether the debtor is a corporation or an individual, the report said.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Request Bankruptcy Law News on Bloomberg Law