So when we think about bankruptcy cases, everything relates to the provisions of the Bankruptcy Code. And the Code tells debtors and Bankruptcy Lawyers in MN - who can file, what chapter can be filed, where the filing takes place, what types of debts are discharged and what types of debt aren’t, just to name a few. In this blog I will write about the definitions of the Bankruptcy Code - what the statute tells us about basic questions.
So that’s a basic question, right? Section 109 of the Bankruptcy Code tells us who can be a debtor in a bankruptcy case, and the definition is quite broad. The definition is largely concerned with making sure that the debtor has ties to the United States. So section 109 tells us that only a “person” who resides or has a domicile, a business, or property in the United States can be a debtor in a bankruptcy case. Section 109 adds that a municipality can be a debtor also -we won’t worry about municipalities - cities have their own bankruptcy chapter (chapter 9) of the bankruptcy code.
So you might think you know who a person is, but the bankruptcy code defines that also, and you might be surprised by the definition. Section 101 of the Bankruptcy Code is titled “Definitions” and the code defines person. According to the bankruptcy code, for bankruptcy purposes, a person is “an individual, partnership, or corporation.” So whenever the code refers to a person filing a bankruptcy case, or the obligations of a person after a case is filed, we’re talking about individual persons, or a business, or a partnership.
Now that we know who a person is, according to the bankruptcy code, the next question is whether there is any limitation on the bankruptcy chapter available to an individual or a business that is having financial trouble. As I’m sure you might guess, the answer is yes, there are rules about what chapters are available to what kind of debtor.
First, let’s look at the bankruptcy chapters that have the fewest restrictions on what, or who, can file a bankruptcy case.
Chapter 7 Bankruptcy is available to almost any “person” (as defined by the bankruptcy code). There are some limitations. Chapter 7 is not available to a railroad, domestic (US based) insurance company, bank, credit union, or financial clearinghouse; and chapter 7 is not available to a foreign bank or insurance company, even though that company might do business in the United States.
Why? The easy answer is that chapter 7 is a liquidation proceeding - the chapter 7 debtor has all of its non-exempt assets liquidated and used to pay creditors. With banks, much of the assets owned by the financial institution is the result of deposits or investments made by individuals. And insurance companies collect and invest premium payments from policy holders with the understanding that when a triggering event takes place - a death, injury or accident - the insurance company will pay its policy holders. There is a fundamental issue about a chapter 7 trustee liquidating assets that were deposited, or premiums paid by individuals that Congress has decided should not be exposed to a chapter 7 liquidation. But other than these defined financial institutions, any individual or business (as long as there are sufficient ties to the United States) can file a chapter 7 bankruptcy.
The other chapter that has a “come one, come all “ quality to it is chapter 11. Although chapter 11 is normally viewed to be the bankruptcy chapter that businesses that wish to reorganize can file, there is no limitation as to who can be a debtor under chapter 11. And chapter 11 is the only chapter available to the financial institutions/insurance companies mentioned in the paragraph, above, that are not able to be a debtor under chapter 7.
Chapter 13 Bankruptcy is a commonly-used consumer debt chapter, but chapter 13, and its farm-debt cousin, chapter 12, have more restrictions regarding filing than chapter 7 and chapter 11. Chapter 13 is limited in three significant ways: only people can file chapter 13 bankruptcy cases, the chapter 13 debtor must have regular income and there is a debt maximum that must be observed.
First, let’s look at the requirement that only people (not businesses) can file a chapter 13. Section 109 (e) of the code says that only an “individual” can file a chapter 13. While there is no section 101 definition of “individual” this has been determined to mean living, breathing, people and not businesses.
Second, the individual who files a chapter 13 case must have “regular income.” Again, there’s no section 101 definition to help us with what “regular income” means. Regular income has been determined to not mean wages, salary, commission or self-employment income, only. It means sources of income that are predictable. So a person whose only source of income is rental income has regular income - the rent gets paid in a predictable amount in a predictable period of time.
Third, there is a limit on the amount of debt an individual can have in order to file a chapter 13 bankruptcy case. Section 109 (e) provides that only an individual with less than $394,725 in unsecured debt, and less than $1,184,200 of secured debt can file a chapter 13 case. But within the debt restriction, there’s a caveat. The debt must be “non-contingent” and “liquidated” before the debt counts against the debt limit. What does that mean? For the non-contingent requirement, it means that no other party is obligated to pay on the account, or that if there is a co-debtor, that the co-debtor is not currently paying the account. This comes up in the case of a business debt that the business has incurred - the business is obligated to pay, but the business owner has also signed a guarantee with the creditor that if the business does not pay, the owner will. In this situation, if the business has defaulted on payments, the co-signed debt will be “counted” against the debt limit in the chapter 13 case, even though the debt owed by the person is contingent. Conversely, if the business is current on its payments, the debt will not be counted against the debt limit, since the only obligation the individual has to make payment on the account is if and when the business defaults on the payment.
Liquidated debts are those that have a fixed obligation. An account with a credit card creditor, for instance, is a liquidated debt - there is a specific, defined amount of money owed on the account. Similarly, a debt that has been reduced to a civil judgment after a legal proceeding is a liquidated debt. But a lawsuit that has not yet been adjudicated is not a liquidated debt. So if an individual is the defendant in a lawsuit seeking $500,000 in damages, and a judgment has been entered in that amount, the defendant cannot file a chapter 13 as a way of resolving the defendant’s personal liability on the lawsuit. However, if the defendant files a chapter 13 case prior to the judgment being entered against him, the defendant has no problem with “qualifying” for a chapter 13, since the debt has not yet been “liquidated.” The same requirement that debt be non-contingent and liquidated to “count” against the debt maximums in chapter 13 is present for secured debt, also.
So why does chapter 13 have these limitations, where chapter 7 doesn’t? Since chapter 13 contains a time limitation - chapter 13 plans have to provide for repayment over a minimum of 36 months to a maximum of 60 months, there is a practical problem for a debt-heavy debtor providing and significant dividends to creditors where there is a significant amount of debt. If a debtor has more than $400,000 worth of debt, and only enough income to pay, say, $8000 to unsecured creditors, that means that the unsecured creditors would receive only 2 cents on the dollar as a repayment of the debt owed. The theory is that in order for someone to have debt in excess of $390,000, the debtor in all likelihood has some assets of value that cannot be completely protected in a chapter 7 case and the dividend to creditors will be more from a liquidation of the assets owned by the debtor in a chapter 7 than it would be for these creditors to wait for a dividend payment from a chapter 13 trustee sometime in the future. Chapter 12 also has a debt limit (although the limit is higher), but it also has another restriction that is not present in chapter 13. Section 109(f) requires that Chapter 12 debtors be “family farmers” or “family fisherman.”
So what is a family farmer? Section 101 of the code tells us. A family farmer is an individual, or an individual and spouse, whose aggregate debts do not exceed $4,153,150, and at least 50% of the debt, and 50% of the individual’s income must come from a farming operation. Section 101 of the bankruptcy code has an exhaustive definition of what a farming operation is; the definition is fairly broad to include all kinds of agricultural production, both crop and animal. Section 109 of the code requires that chapter 12 debtors, like chapter 13 debtors, must have a regular source of income. Family Farmers can include corporations and partnerships.
The other occupation that is eligible to file a chapter 12 case is family fisherman. Section101 of the code offers a definition of family fisherman. Section 101 defines family fisherman as an individual or individual and spouse whose aggregate debt totals less than $1,924,550 and at least 80% of the debt, and 50 % of the income must come from a commercial fishing operation. Like chapter 13, a family fisherman can include a corporation or a partnership. And like family farmers, family fishermen must have a regular source of income to file a chapter 12 case.
The last chapter that section 109 of the bankruptcy code deals with to define who can file a bankruptcy case is chapter 9, which is the chapter available to municipalities. The “take away” from the review of section 109 (who may be a debtor) and section 101 (definitions) is that bankruptcy relief is available for just about anyone in the United States who desires this relief. But there are significant differences between the chapters as to who is eligible to file a case under a specific chapter, and it is well worth an individual’s time to consult with an experienced attorney as to whether a bankruptcy case is in the individual’s best interest, and, if so, which chapter to file.
Once there has been a decision made as to if an individual or a business can file a bankruptcy under a certain chapter, the next question is whether the debtor has the ability to file a case right away, or whether the individual should wait to file. Also, the debtor needs to make a decision in some cases as to where to file his or her bankruptcy case. The decision as to when to file a case can be simply one of strategic planning. At the consumer level, issues could include waiting to see if income will increase pending a job change, or if it is better to wait until after a divorce has been finalized. There typically isn’t much of a discussion with you MN Bankruptcy Attorney about where to file a case, but this comes up periodically when a debtor lives in one state, but the business owned by the debtor, or the debtor’s most valuable asset is located in another state. The bankruptcy code guides us with both these issues. That will be the topic for next week’s blog.