This limited discussion concerns cases involving primarily consumer debt, in which the debtor(s) exceed the debt limits for chapter 13 cases (as of this writing $419,275 unsecured and $1,257,850 secured in noncontingent, liquidated debts).
An individual consumer chapter 11 case is essentially a jumbo chapter 13 case, with a very important difference. Unlike in chapter 13, creditors in such cases get to vote on the debtor’s plan of reorganization. If all creditor classes do not accept the plan, at least one class of claims that is “impaired” under the plan must accept the plan for the debtor(s) to have a chance at Bankruptcy Court approval, through a process known as “cram-down”.
And even if the unsecured creditor class votes by half in number and two-thirds in amount of allowed claims to accept the plan, any single unsecured creditor may file an objection to confirmation, triggering the application of the “absolute priority rule”.
The absolute priority rule is a judge-made rule that pre-dates the Bankruptcy Code. It requires that senior classes of claims be paid in full before junior classes of claims (creditor claims) or interests (ownership interests) may receive or retain any property under the plan. Think about that in the context of an individual case.
If a single unsecured creditor objects, an individual chapter 11 debtor may not retain his or her property under the plan. An individual chapter 11 debtor may be able to shade this result in a particular case by committing exempt property, borrowed or gifted money or property to fund the plan. But the “new value” being contributed as an exception to the absolute priority rule must be roughly equivalent in value to all of the property that the debtor is retaining under the plan.
If the individual chapter debtor is engaged in business, there is a better way to obtain relief, and that is through the newly enacted Small Business Reorganization Act (“SBRA”), effective February 19, 2020. Please refer to the SBRA section on this website under Business Bankruptcy.
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.