Cite as: Keith M. Lundin, Lundin On Chapter 13, § 8.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
In many jurisdictions, Chapter 13 is a welcoming, affordable and efficient form of bankruptcy relief. Often, the same cannot be said for relief under other chapters.
Bankruptcy isn’t free. At this writing, the average attorney fee for a Chapter 7 case is $1,072; for a Chapter 13 case the average attorney fee is $2,564.1 Nothing more said, which chapter will most individual debtors choose? Counsel’s task is to explain that it isn’t that simple—chapter choice for a potential consumer debtor is more than just the dollar difference in probable attorney fees between a Chapter 7 and a Chapter 13 case.
After Lamie v. United States Trustee,2 a debtor heading into a Chapter 7 case can expect to have to pay all attorney fees and expenses in full, up front, in advance of filing. Bankruptcy attorneys know that any prepetition debt for bankruptcy services cannot be paid from the Chapter 7 estate and will be discharged in a Chapter 7 case. They routinely require cash payment in full before filing a Chapter 7 case.
Chapter 13 practice is different. In many districts, Chapter 13 attorneys accept some or all of their fees as periodic payments through the plan. A “routine” Chapter 13 case requires more work than a “routine” Chapter 7 case and thus average attorney fees are higher, but debtors typically do not have to front-load the full tariff for a Chapter 13 case and can pay filing fees, attorney fees and expenses over time after filing. Though controversial, on the right facts, courts have confirmed Chapter 13 plans that pay attorney fees and little else.3 For cash-strapped debtors Chapter 13 may be the only bankruptcy relief that is immediately affordable.
Chapter 7 is not always the quicker, simpler or less expensive solution to individual debtor distress. Especially when the debtor has obligations that may be nondischargeable in a Chapter 7 case, preempting the creditors’ complaints and proceeding directly into Chapter 13 is less expensive and more immediate bankruptcy relief.4 Nondischargeable claims may provoke objections to confirmation in the Chapter 13 case,5 but the expense and delay of the Chapter 13 confirmation process are rarely as great as in the trial of a Chapter 7 discharge or dischargeability complaint.
Trustees are nicer in Chapter 13 cases. Not so strange a claim when you think about it and a good reason for selecting Chapter 13 over Chapter 7 for consumer debtors.
At its most basic, a Chapter 7 trustee is a panel trustee appointed by the Justice Department to collect and liquidate all of the debtor’s nonexempt property. The trustee investigates and ferrets out assets that might be sold, and a Chapter 7 trustee makes real money only when the debtor’s property is sold and proceeds are paid to creditors. This is an inherently adversarial process. Chapter 7 trustees are not rewarded for helping debtors or their counsel. Chapter 7 trustees make their reputations by being resourceful investigators, liquidators and litigators.
Chapter 13 trustees are different. A Chapter 13 trustee is prohibited by statute from using or possessing property of the estate—the debtor has those rights and powers exclusive of the Chapter 13 trustee.6 The trustee in a Chapter 13 case is required by the Bankruptcy Code to “advise . . . and assist the debtor in performance under the plan.”7 In most districts, this means that the debtor and debtor’s counsel can expect help from the Chapter 13 trustee toward shared goals of confirmation of a plan and staying in the case until creditors are paid to the best of the debtor’s ability. Of course, there are times when the Chapter 13 trustee opposes a debtor’s plan or litigates the debtor’s right to be in Chapter 13. But the most successful Chapter 13 programs across the country are characterized by trustees committed to “making it work” by working with debtors and their counsel.
Chapter 7 is often touted as the quickest form of bankruptcy relief—especially the “no asset” case in which an “honest” debtor faces no discharge or dischargeability litigation. But fast is not always better for individual consumer debtors. Sometimes a Chapter 7 case just moves too quickly to provide much relief to the debtor.
In some jurisdictions, 90 days is the outside life expectancy of a no-asset Chapter 7 case. It is not unusual for a run-of-the-mill Chapter 7 case to be closed within a few days of the § 341 meeting of creditors—when the panel trustee files a no-asset report and moves on. The automatic stay terminates in a Chapter 7 case when the case closes.8 The breathing time for the debtor can be so fleeting that the debtor doesn’t really catch breath before foreclosure notices and repossessions begin anew.
Chapter 13 is different. The automatic stay lasts as long as the debtor keeps the case healthy by making payments, confirming a plan and, did I mention, making payments. Three to five years of protection from creditors is real time to get the debtor’s finances in order and reduce or eliminate the stresses that brought the debtor to counsel in the first place. Some debtors just need the extra time and they won’t find it in a Chapter 7 case.9
A Chapter 11 case is almost always more expensive and more complicated than a Chapter 13 case. To accomplish confirmation in a Chapter 11 case, the debtor must propose a disclosure statement and a plan of reorganization and survive the voting and confirmation process. Even a simple disclosure statement and plan involve expense and time to prepare separate documents, attend the disclosure statement hearing, distribute ballots for voting, tabulate the voting and appear at a separate confirmation hearing. If the creditors do not accept the plan, Chapter 11 confirmation very quickly becomes a complicated and uncertain process.
For most individual debtors, the expense of attorneys and other professionals necessary to test confirmation of a Chapter 11 plan prohibits access to Chapter 11.10 By contrast, the drafting, distribution and confirmation of a Chapter 13 plan are simple and affordable, and the likelihood of confirmation can be more accurately assessed by debtor’s counsel because the volume of Chapter 13 cases in most jurisdictions has produced relatively well-defined boundaries for confirmation. The use in many districts of a standard form for the Chapter 13 plan11 has greatly simplified the process of proposing and confirming Chapter 13 plans. Even more promising is the forthcoming Official Form for the Chapter 13 Plan under construction by the Advisory Committee on Bankruptcy Rules.12
In 1994, Congress amended Chapter 11 to make it more attractive to small businesses. Section 217 of the Bankruptcy Reform Act of 199413 defined a new “small business” Chapter 11 debtor with aggregate noncontingent, liquidated, secured and unsecured debts of less than $2 million—now $2,490,925 as a result of automatic adjustments. Section 1116 was added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)14 to describe the duties of a trustee or debtor in possession in a small business case. A small business Chapter 11 debtor can avoid the appointment of committees, has a longer exclusivity period and has fewer requirements with respect to the disclosure statement, the solicitation of acceptances and the prosecution of a plan.15 The 1994 and 2005 amendments reduce the complication and expense of Chapter 11 for some who qualify as small businesses. However, for most individual consumer debtors who qualify for both Chapter 13 and small business treatment under Chapter 11, the Chapter 13 alternative remains the less complicated and less expensive process.
Given the definitions in the Code, it is hard to imagine an entity not eligible for Chapter 11 that would be eligible for Chapter 13.16 However, prior to 1991 there was case law suggesting a class of individual debtors who were ineligible for Chapter 11 relief but eligible for Chapter 13.
Prior to 1991, it had been held that an individual not engaged in business was not eligible for reorganization in a Chapter 11 case.17 This rule left an individual not engaged in business with no reorganization alternative except Chapter 13.
In 1991, in Toibb v. Radloff,18 the Supreme Court held that even an individual not engaged in business is eligible for Chapter 11 relief. The Supreme Court’s declaration of Chapter 11 eligibility for nonbusiness individuals did not produce a flood of debtors out of Chapter 13 into Chapter 11. Chapter 11 remains more time consuming and expensive, and the “business bias” of Chapter 11 is a difficult fit for most nonbusiness individuals.
Prior to the Bankruptcy Reform Act of 1994, individual debtors would sometimes use Chapter 11 to manage a problem real estate mortgage. Prior to 1994, Chapter 11 debtors had powers not available under Chapter 13 to modify a mortgage on a debtor’s principal residence to stretch repayment of the claim over more than five years and to change interest rates or monthly payments.19 Though the Supreme Court resolved that nonbusiness individuals were eligible for Chapter 11, the courts were reluctant to allow nonbusiness debtors to use Chapter 11 merely to rewrite a residential mortgage, and there remained the problem whether a Chapter 11 debtor could demonstrate that a personal residence was “necessary to an effective reorganization” to defeat a request for relief from the stay in a Chapter 11 case.20
In 1994, Congress amended § 1123(b) to restrict the treatment of home mortgages in Chapter 11 cases to the treatment available in a Chapter 13 case. Section 206 of the Bankruptcy Reform Act of 199421 added to the list of permissive plan provisions in § 1123(b) that a Chapter 11 debtor may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence. . . .”22 This new § 1123(b)(5) is identical in wording to § 1322(b)(2).23 The legislative history to the 1994 enactment states, “[T]his amendment conforms the treatment of residential mortgages in Chapter 11 to that in Chapter 13, preventing the modification of the rights of a holder of a claim secured only by a security interest in the debtor’s principal residence.”24
New § 1123(b)(5) has been interpreted by the courts consistent with this statement of legislative intent—individual debtors not engaged in business, though eligible for Chapter 11 relief, will not find Chapter 11 a more hospitable environment for managing a problem home mortgage. The 1994 enactment of § 1123(b)(5), together with the greater difficulties of navigation in Chapter 11, ensure that most debtors’ counsel will choose Chapter 13 rather than Chapter 11 for eligible debtors with home mortgage problems.25
BAPCPA made many other changes to individual Chapter 11 cases that complicate the chapter selection choice for debtors eligible for both chapters. For example, after BAPCPA “property of the estate” in an individual Chapter 11 case includes all property and earnings that the debtor acquires after commencement of the case26—aligning the content of the estate in individual Chapter 11 and Chapter 13 cases.27 BAPCPA has confused, if not complicated, confirmation of an individual Chapter 11 plan by incorporating Chapter 13 concepts into Chapter 11.28 Appendix Z contains more detail on the BAPCPA changes to individual Chapter 11 cases.
Though not intended to be complicated, expensive or time consuming, in some jurisdictions the prosecution of a Chapter 12 case is not a simple process. Some jurisdictions expect the Chapter 12 plan to resemble the disclosure statement and plan familiar to Chapter 11 practice. If the debtor is eligible for both chapters, Chapter 13 may be more realistic because it is simpler, less expensive and more certain of outcome.29
1 Lois R. Lupica, The Consumer Bankruptcy Fee Study: Final Report, 20 Am. Bankr. Inst. L. Rev. 17 (2012).
2 540 U.S. 526, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (Jan. 26, 2004).
5 For the separate classification of nondischargeable claims, see § 88.1 In General, § 88.2 Nondischargeable Claims after BAPCPA, § 88.3 Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10), § 88.4 Alimony, Maintenance and Support, § 88.5 Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA, § 88.6 Student Loans, § 88.7 Restitution, Fines and Other Criminal Problems, § 88.8 Driving, Boating or Flying while Intoxicated, § 88.9 Long-Term Debts and § 88.10 Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case; for dischargeability as a basis for a good-faith objection to confirmation, see § 106.1 In General, § 106.2 Criminal Misconduct, § 106.3 Alimony, Maintenance and Support, § 106.4 Student Loans and § 106.5 Separate Classification of Nondischargeable Claims and Good Faith.
6 See 11 U.S.C. §§ 1303 and 1306(b), discussed in § 45.1 Debtor Has Exclusive Possession and Control of Estate Property.
7 11 U.S.C. § 1302(b)(4), discussed in § 53.5 Advise and Assist Debtor.
8 See 11 U.S.C. § 362(c)(2)(A).
9 See also § 8.19 Debtor Needs Discipline of a Chapter 13 Case. But see In re Petrone, 498 B.R. 1, 3 (B.A.P. 1st Cir. Sept. 11, 2013) (Lamoutte, Haines, Deasy) (Bankruptcy court appropriately denied debtor’s 28th motion to delay entry of discharge in four-year-old case. “Notwithstanding Bankruptcy Rule 4004(c)(1), a bankruptcy court may defer the entry of debtor’s discharge for up to 30 days, and, if the debtor files another motion within that 30–day period, the bankruptcy court may exercise its discretion to further defer the entry of discharge to a ‘date certain.’ . . . ‘The threshold prerequisite to an exercise of discretion to defer discharge under Rule 4004(c)(2) is that the debtors must be acting in good faith.’ Although multiple extensions may be warranted under certain circumstances, Bankruptcy Rule 4004(c)(2) cannot be used to delay the entry of discharge indefinitely.”).
10 See H.R. Rep. No. 95-595, at 319–20 (1977) (recognizing that “Chapter 11 reorganization is too cumbersome a procedure” for some sole proprietors).
11 See § 72.6 Model Plan (BAPCPA).
12 See § 72.6 Model Plan (BAPCPA).
13 Pub. L. No. 103-394, § 217, 108 Stat. 4106 (1994). See 11 U.S.C. § 101(51C).
14 Pub. L. No. 109-8, 119 Stat. 23 (2005).
15 See 11 U.S.C. §§ 1116, 1121(e), 1125(f).
16 Under 11 U.S.C. § 109(d), any person that may be a debtor under Chapter 7 is eligible to be a debtor under Chapter 11, except a stockbroker, a commodity broker, or a railroad. Given the unlikelihood that a railroad would ever be an individual and given that the “person” eligible for Chapter 11 relief is broader and inclusive of the “individual with regular income” eligible for Chapter 13 relief, the definitions seem to preclude that a person would be ineligible for Chapter 11 but eligible for Chapter 13.
17 See Toibb v. Radloff, 902 F.2d 14 (8th Cir. May 2, 1990) (Arnold, Ross, Fagg), rev’d, 501 U.S. 157, 111 S. Ct. 2197, 115 L. Ed. 2d 145 (June 13, 1991); Wamsganz v. Boatmen’s Bank of DeSoto, 804 F.2d 503 (8th Cir. Nov. 7, 1986) (Ross, Wollman, Magill); In re Winshall Settlor’s Trust, 758 F.2d 1136 (6th Cir. Apr. 5, 1985) (Kennedy, Wellford, Weick); In re Dolton Lodge Trust No. 35188, 22 B.R. 918 (Bankr. N.D. Ill. Sept. 8, 1982) (Eisen); In re Ponn Realty Trust, 4 B.R. 226 (Bankr. D. Mass. May 9, 1980) (Lavien).
18 501 U.S. 157, 111 S. Ct. 2197, 115 L. Ed. 2d 145 (June 13, 1991).
19 See 11 U.S.C. § 1322(b)(2), (5). Compare 11 U.S.C. § 1123(a)(5) (prior to amendment in 1994).
21 Pub. L. No. 103-394, § 206, 108 Stat. 4106 (1994).
22 11 U.S.C. § 1123(b)(5), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 206, 108 Stat. 4106 (1994).
24 104 Cong. Rec. H10,752, H10,767 (daily ed. Oct. 4, 1994) (section-by-section analysis by Congressman Brooks).
25 See § 8.12 Home Mortgage Problems.
26 11 U.S.C. § 1115(a).
27 11 U.S.C. § 1306(a).
28 See App. Z.