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The Chapter 11 Individual Debtor

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The Chapter 11 Individual Debtor The January 2014 subgroup of the Delaware Bankruptcy Inn of Court presents…. THE CHAPTER 11 INDIVIDUAL DEBTOR A case study based on completely normal facts and completely generic clients that might walk into your office and ask you for bankruptcy help with a twist. Starring the superlative acting skills of And with special thanks for the excellent (in order of appearance, approximately): written materials prepared by: (in order of penmanship, approximately): Deirdre Richards Johnna Darby Sandy Retsky Damien Tancredi Kathleen Murphy Robert Mallard Aaron Applebaum Mark Collins Thomas Horan Sandy Retsky Damien Tancredi Bill Hazeltine Deirdre Richards Allessandra Glorioso Adam Hiller Joseph Argentina Lucy Qiu Adam Hiller THE CHAPTER 11 INDIVIDUAL DEBTOR Delaware Bankruptcy Inn of Court I. An Introduction To The Individual Chapter 11 Debtor. a. Why would an individual ever need to go into Chapter 11? i. Chapter 13 may be a non-viable option. The debtor is eligible for Chapter 13 (“wage earner plans”) only if the Debtor meets both threshold requirements: (1) must earn regular income, and (2) must fall within the statutory debt limits. a. Regular Income. Per 11 U.S.C. § 101(30), regular income “means an individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 . ..” The source of the income does not matter; it can come from “pensions, public assistance payments, self employment, or investments. [S]upport payments and stable and predictable income from friends and family can sometimes qualif[y].” JEFFREY T. FERRIELL, UNDERSTANDING BANKRUPTCY, 171-72 (2013). b. Debt Limits. Per 11 U.S.C. § 109(e), Chapter 13 debt limits are “noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 . ..” The amount of debt is calculated on the date of petition filing. “In a joint case involving a married couple, debts are aggregated to determine whether they exceed these thresholds.” Ferriell at 171-72. (1) Contingent. Contingent means the “debtor’s liability depends on the occurrence or non-occurrence of an event that is uncertain at the time of the debtor’s petition.” Ferriell at 173. (2) Liquidated. A liquidated debt is one that, as of the petition date, “is subject to ready determination and precision in the amount due.” Ferriell at 173 (citing In re Slack, 187 F.3d 1070 1073 (9th Cir. 1999); In re Huelbig, 299 B.R. 721, 723 (Bankr. D.R.I. 2004)). An example of an unliquidated debt is liability on a personal injury claim. (3) Secured v. Unsecured Debt. “The valuation test of § 506 is used to determine the extent to which a debt is secured or unsecured.” Ferriell at 175. The value of the portion of debt secured by collateral is counted towards secured debt in the § 109(e) formula. The portion unsecured by collateral is counted towards unsecured debt in the § 109(e) formula. ii. Chapter 7 may be a non-viable option. The debtor cannot remain in Chapter 7 because the individual fails the means test pursuant to 11 U.S.C. § 707(b)(2). Under § 707(b)(2), there is a means test putting debt limits on individuals primarily with consumer debts to qualify for Chapter 7. This means test was added to the Bankruptcy Code in 2005 under the BAPCPA Amendments to prevent abuse. Abuse is presumed when the debtor fails the means test under § 707(b)(2). (In addition to failing the means test, abuse can also occur with a finding of bad faith or when the totality of the circumstances demonstrates abuse pursuant to § 707(b)(3)) The means test uses the debtor’s CMI and deducts expenses allowed under § 707(b) to determine the debtor’s disposable monthly income and then makes the comparison to the MFI. The allowed expenses under § 707(b) are the debtor’s “applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides.” 11 U.S.C. § 707(b)(2)(A)(ii). b. Differences between Chapter 11 and 13 1. Creditors do not approve Chapter 13 plans. 2. Chapter 13 debtor must be an individual. Business organizations are not eligible for Chapter 13. 3. Eligibility constraints: as above, must have regular income and be within the debt limits of § 109(e). 4. Debtor does not receive a discharge until the reorganization plan has been approved, i.e., confirmed by the court, and the debtor has made the requisite plan payments. 5. Chapter 13 cases are administered by a “standing” trustee. The trustee aids the court in deciding what the debtor’s disposable income and collects this income and pays creditors. 6. No initial operating report, monthly operating reports, quarterly operating reports, or other reporting requirements. 7. The filing fee is only $281, as compared to $1,213 for Chapter 11. 8. No official committees. 9. Debtor is not a debtor in possession and has no fiduciary duties to creditors. 10. No routine involvement by Office of the United States Trustee. 11. Chapter 13 plan is limited to five years. -2- c. BAPCPA and the evolution of the Bankruptcy Code’s individual Chapter 11 provisions.1 Congress clearly attempted to make changes to how individuals operate in Chapter 11 cases. 1. Expanded grounds for dismissal or conversion. BAPCPA emphasizes the importance of domestic support obligations with the addition of § 213. Individual Chapter 11 debtors will not receive plan confirmation unless post- petition obligations are current. 2. Diminished courts discretion in determining whether a case should be dismissed or converted. Congress replaced the language “may convert . or dismiss a case.., for cause” in § 1112(b)(1) with “shall convert. or dismiss . if the movant establishes cause.” This language greatly limits the discretion of courts to determine the appropriate disposition of a case when presented with a motion to dismiss or convert. 3. Property of the Estate. Added § 1115 to simulate the treatment of property of the estate in Chapter 13. Post-petition earnings prior to BAPCPA were not part of the estate in Chapter 11. 4. Absolute Priority Rule changes. It is unclear how, if at all, Congress changed the impact of the Absolute Priority Rule in individual Chapter 11 cases, as discussed more fully below. 5. Delayed discharge of debts. Individual Chapter 11 debtors under the new § 1141(d)(5)(A) generally do no obtain a discharge until all plan payments have been made. Prior to BAPCPA, discharge was at time of confirmation or whenever provided for in the confirmed plan. II. Traditional Consumer Issues in the Context of a Chapter 11 Proceeding a. Personal/family issues. 1. Domestic Support Obligations: § 1129(a)(14): Individual debtor must be current with all domestic support obligations. 2. Need for cash collateral use to pay personal (and family) expenses. 1 For a more in-depth discussion of this evolution, see Robert J. Landry, Individual Chapter 11 Reorganizations: Big Problems With The New “Big” Chapter 13, 27 U. Ark. Little Rock L. Rev. 251 (2007). -3- i. Nothing in section 363 requires an individual debtor to obtain court approval to pay ordinary living expenses from their earned income. Proposed post-confirmation expenses are relevant under 1129(a)(15). ii. What constitutes “reasonable” living expenses for purposes of section 363? Should standard of living be considered? Disposable income test? Minimal standard of living? a. Private School? b. Recreation and gifts? c. Non-income producing vacation homes? b. Joint ownership of earned income – spouse in community property state has an ownership interest in spouse’s earned income. c. Individual debtors should create a monthly budget and seek court approval for such expenses as “ordinary.” 1. In re Bradley, 185 B.R. 7, 11 (Bankr. W.D.N.Y. 1995) (refusing to impose a budget on individual chapter 11 debtor). 2. In re Rodriguez, 41 B.R. 774 (Bankr. S.D. Fla. 1984) (approving personal expenses of $7,000 per month). 3. In re Cardillo, 170 B.R. 490 (Bankr. D. N.H. 1994) (refusing to consider status or lifestyle in determining reasonableness of expenses); In re Jones, 55 B.R. 462 (Bankr. D. Minn. 1985) (same). 4. In re Watson, 403 F.3d 1 (1st Cir. 2005) (private school tuition not reasonable); In re Gleason, 267 B.R. 630 (Bankr. N.D. Iowa 2001) (recreation and gift not reasonable); In re Dick, 222 B.R. 189 (Bankr. D. Mass. 1998) (vacation home expense not reasonable) 5. U.S. v. Sutton, 786 F.2d 1305 (5th Cir. 1986) (incarcerated debtor not permitted to have estate pay living expenses of wife and minor children). b. Discharge and dischargeability. i. BAPCPA added special provisions to section 1141 that govern the discharge of individuals under chapter 11. 11 U.S.C. § 1141(d)(5). 1. Full Payment Before Discharge. An individual will not receive a discharge until all plan payments are completed “unless after notice and a hearing the court orders otherwise for cause.” 11 U.S.C. § 1141(d)(5)(A). This will generally take five years, although it is easy to contemplate plans extending beyond this time frame. This is a substantial change from prior law, under which -4- all chapter 11 debtors, including individuals, received a discharge upon plan confirmation. The statute gives no hints about what might constitute cause for an earlier discharge. 2. Early discharge: Debtor may apply for early discharge if (a) value of property distributed already equal to what creditors would have received in chapter 7; (b) modification of plan is not practicable; (c) court finds, after notice and a hearing 10 days before discharge, Section 522(q) provisions re securities law crimes are not applicable.
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