Bankruptcy Estate in Chapter 11 and 13

Chapter 11 allows the Debtor to stay in possession of all his property, even though the property is above the exemption amount. (or threshold amount, as I labelled it in my Bankruptcy Estate in Chapter 7 post)  Chapter 13 is only for human beings, and legal entities are excluded – Chapter 11 can be filed by both individuals and corporations.  The role of the Chapter 13 Trustee is to screen a Chapter 13 plan (prepared and filed by the Debtor) that conforms to the bankruptcy code before it goes before and gets signed by the Judge.  Similarly, the US Trustee, who is the main player in a Chapter 11, is present to make sure that the Chapter 11 process is not being abused, and that creditors are not compromised by the extensive 120 day period where the Debtor comes up with a plan.  (the timing is much shorter in 13)

The two types of trustees are very different – Chapter 13 Trustees are motivated by plans that make logical sense per the Bankruptcy Code.  The Chapter 7 Trustee has an equal interest in making sure that documents conform properly to the code, but on the other hand, is also motivated by profit – oftentimes Standing Chapter 7 Trustee are successful bankruptcy or creditor lawyers or accountants that have extensive business knowledge.  This results in a focus on unexempt assets.  A Chapter 13 Trustee on the other hand is more focused on your income and expenses because your future income is what determines whether or not your repayment plan is successful.

A Chapter 11 is probably the most tricky because the Trustee is very vigilant about making sure that the Debtor is solvent enough pay because the time frames are much longer – you can get up to a six months to put together a plan.  Not only that, they are vigilant about the attorneys who are handling the case and will often object based on an attorneys experience or track record. (e.g. is this your first case?  Do you have co-counsel?  Do you file too many failed Chapter 11’s?)

Creditors are hosed because the automatic stay doesn’t allow them to collect the amounts they are owed, and they have a sharp learning curve with regards to figuring out what they need to do and if not, have to scramble to get lawyers if they are not well versed in the law. Therefore, it is essential that proper planning take place before a 11 or 13, as the Trustee may try to dismiss your case if you cannot come up with a feasible way of paying back who needs to be paid.  In a Chapter 11 and 13, there are creditors who MUST get paid, and there are creditors who MAY get paid.

Chapter 11 is also full of ethical landmines for the unsuspecting attorney.  A Chapter 11 attorney sometimes represents the individual, the Corporation, and the Bankruptcy Estate.  The interests of each may come into conflict.

For example, suppose the CEO of a Corporation with five employees, all of whom are family members, pays you to file and defend a Chapter 11 to save his company. All your dealings are between you and this CEO.  A time may come when the CEO decides that he doesn’t care anymore and just wants to walk away with the skin on his back.   An attorney’s primary responsibility may still be to the Corporation, which means maximizing profits for creditors, or keeping the company afloat – not minimizing the exposure of the CEO and his family.   This is because technically, the corporation is paying you, and the CEO is only acting on the Corporation’s behalf.

Believe me – that’s an awkward conversation to have.

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