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Bankruptcy Bill May Spur
More Chapter 11 Filings

March 15, 2005; Page D2

High-end individuals in financial distress may want to consider a Chapter 11 bankruptcy, long the haven of corporate debtors, because of new restrictions in the recent bankruptcy legislation.

At present, most individuals file under Chapter 7 of the U.S. Bankruptcy Code, a relatively simple way to avoid creditors and erase debt. The bankruptcy legislation would compel more individuals in debt to file under Chapter 13, which requires filers to repay part of their bills with regular payments over five years.

The new legislation would make it tougher for individuals to qualify for a Chapter 7 bankruptcy filing. Filers with income higher than their state's median income could find themselves forced into Chapter 13, which also can force individuals to allocate their disposable income to the repayment plan. Among other provisions, credit counseling would be required. Under the current bankruptcy code, a person can file under Chapter 13 if he or she owes unsecured debts of less than $307,675 and secured debts of less than $922,975.

Unlike Chapter 13, individuals aren't required to be in Chapter 11 for a mandatory period of time, says Karen Gross, a bankruptcy professor at New York Law School. There is also no trustee involved in a Chapter 11 plan, which means an individual would have more opportunity to negotiate a suitable plan with creditors, she says. With the new bankruptcy legislation, "Chapter 11 will become an increasingly interesting alternative," she says.

Few individuals file under Chapter 11, which often is associated with corporate giants such as Enron Inc. and WorldCom Inc. Chapter 11 cases are generally more complex, with more procedural hurdles to leap. The filing fee and attorney fees also are higher.

The number of Chapter 11 filings in 2004 totaled 10,132, according to data from the Administrative Office of the U.S. Courts. Only a small fraction of those filings were individuals, the American Bankruptcy Institute estimates.

That could change with the bankruptcy legislation, which passed the Senate on Thursday and is expected to pass the House next month.

Joseph Baldiga, a partner at Mirick O'Connell LLP who heads the firm's bankruptcy group in Westborough, Mass., plans to advise clients who want to preserve their assets or future income to consider filing under Chapter 11. By being able to negotiate with creditors, "there's a sense [debtors] retain more control and flexibility," he says.

Other bankruptcy experts don't see much changing for individuals with high net worths as a result of the bill, which President Bush is expected to sign. George H. Singer, a partner in the bankruptcy group at law firm Lindquist & Vennum in Minneapolis, says such individuals often prefer the less cumbersome Chapter 13 filings but are forced to file under Chapter 11 because their debts are too high. "All in all, I can't see people saying in light of this bankruptcy legislation, 'Get me into Chapter 11,' " he says.

Howard Bader, a partner and bankruptcy specialist at law firm Ballon Stoll Bader & Nadler in New York, cautions that it may be too soon to judge the impact of the legislation's restrictions on Chapter 13. "You really have to see how some of these new rules flush out and how the judges are going to look at this," he says.

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