While it does not happen often, the bankruptcy code does update. Congress, as intended, is a slow moving machine when it comes to passing legislation. This often means certain areas of the law, including bankruptcy, will often go years without seeing any substantial modification. But recently, there have been updates to chapter 11 and chapter 13 respectively. In this blog post, we will discuss some recent changes to both chapters, and how they may effect newer filings.
Chapter 11
The purpose of a business chapter 11 bankruptcy is for the debtor to reorganize. Filing for chapter 11 effectively gives the debtor some breathing room from its creditors collection efforts to determine how the business should continue to operate and repay its debts in the future. This can be through the sale of assets, the use of income, or taking out structured loans to repay the overdue debts. A chapter 11 is meant to help a business get back to a point of profitability, and this is all accomplished through the chapter 11 plan.
But in a bankruptcy case, can the principals of a business create a plan that also calls for immunity for said principals from the risks of civil litigation? Recently, the United States Supreme Court said no. As many are aware, Purdue Pharma had recently filed for bankruptcy protection under chapter 11. A driving force behind this filing was the various lawsuits brought by victims of the opioid epidemic and their families for sale of drugs that contributed to the opioid epidemic.
Purdue filed a chapter 11 plan that included the Sackler family, the former principals of Purdue, to contribute roughly $6 billion to the plan for the purpose of settling all claims held by these claimants. With that sizable contribution, the Sacklers sought to include a provision in the plan that would grant a court order barring any further litigation against the Sackler family by the victims.
For reference, these arguments are not entirely new. For example, some Catholic diocese have used this exact tactic before in filing for bankruptcy relief, and using the chapter 11 plan to resolve mass injury claims through bankruptcy. This allows the individual diocese to settle the claims through their bankruptcy, without further liability of the churches themselves. Similarly, in 1994, Congress created a system of bankruptcy trusts to ensure that current and future victims of asbestos related diseases could receive compensation from corporations with liability exposure. Essentially, Congress forced asbestos companies to include in their chapter 11 plan the creation of a fund for future victims, as the number of victims of asbestos was impossible to know at the time.
Now, the Supreme Court has denied the Sacklers the ability to escape liability through a fixed number to be paid through the plan to potential victims. The court found that the payment by the Sacklers could not allow them to escape liability where they themselves had not filed for bankruptcy.
It should be noted that the Purdue case is also an example of what the powers of the United States Trustee entail. 95% of the creditors voted to approve Purdue’s chapter 11 plan. It was only due to opposition by the trustee, in addition to the Justice Department’s bankruptcy watchdog, that the plan was challenged at all.
In conclusion, while the issue may not arise often, it is a good reminder that an owner of a company may still be liable for actions taken on behalf of the business, even if the business itself has filed for bankruptcy protections.
Chapter 13 requirements
Similarly to a chapter 11, a chapter 13 bankruptcy case calls for the filing of a plan to repay at least a portion of a creditor’s debts. Whether through the sale of assets, disposable income, or use of equity, a chapter 13 debtor can expect to make monthly payments for the life of their chapter 13 plan. Chapter 13 does have limits, however, and those limits were recently changed.
Previously, Congress expanded the debt limits on a chapter 13 case to a total of $2,750,000.00. However, this change was not permanent, and was set to revert on June 21, 2024, unless Congress acted otherwise. This did not happen. As such, the “new” debt limits in a chapter 13 case require a debtor to have no more than $465,275.00 in unsecured debt, and no more than $1,395,875.00 in secured debt.
These debt limits only include noncontingent, liquidated debt. This means the amounts alleged to be owed by the debtor must be a known amount that can be easily determined. If a debtor finds themselves needing to file bankruptcy, but have debts that are over these limits, they will likely need to file for chapter 11 protection instead of chapter 13.
In conclusion, the bankruptcy law may take some time to change, but it is a complicated facet of our legal system. It is important to hire expert attorneys who stay up to date on current legal proceedings that may affect your case.
