What Debts Can Be Discharged In A Chapter 11 Bankruptcy?

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In a business Chapter 11, the debtor receives a discharge upon confirmation of the plan. In that case, the only debt that isn’t discharged is a nondischargeable tax debt. Other debts are discharged.

On the other hand, in a Chapter 11 for an individual or a married couple, things are quite different. First, the debtor doesn’t get the discharge upon confirmation. Instead, the debtor gets a discharge after substantial completion of the plan, which could be five years after the plan has been confirmed. The list of debts that are not dischargeable in Chapter 11 for individuals or married couples, is the same as the list of nondischargeable debts in a Chapter 7.

For example, most tax debts are nondischargeable, as are student loans, obligations to pay child support or alimony, fines or penalties imposed by a judge to punish the debtor for having done something wrong, debts that are incurred through fraud, debts that are the result of a breach of the fiduciary duty, debts that are the result of doing willful and malicious harm to a person or property, and homeowner’s dues that come due prior to the day the debtor files for bankruptcy. The complete list is in section 523(a) of the Bankruptcy Code.

One kind of debt that is dischargeable in a Chapter 13, but not in a Chapter 7 or Chapter 11 is a debt to a spouse or former spouse, that is not child support or alimony, and that was incurred as part of a separation agreement or a divorce decree.

For example, suppose the divorce judge assigns some debts to a debtor who subsequently files for Chapter 11 protection. With respect to those creditors the debt is dischargeable. If one of those creditors attempts to collect from the nondebtor ex-spouse, the ex-spouse can go back to the divorce judge and ask for contributions from the debtor to pay the debt. The divorce judge will grant the request. It is in that sense that a debt to a spouse or former spouse that’s assigned in the divorce decree or separation agreement, is not dischargeable.

How Long Does A Chapter 11 Bankruptcy Case Last?

The length of a Chapter 11 bankruptcy will depend on the type of case, and the peculiar facts of the case. There is quite a range.

On the one hand, sometimes, it’s clear, ab initio, that the case has no chance of success, and shortly after filing the Court dismisses it. On the other hand, a Chapter 11 case can stretch out for many years.

An individual Chapter 11 case typically lasts for three to five years, though I have had cases lasting longer. In one of my recent cases, my client had an unsecured debt that had to be paid in full over the life of the plan, but the debt was too large to be paid in five years. After successful negotiations, we proposed a seven-year plan that the Court confirmed.

The Bankruptcy Code requires a debtor in a Chapter 11 Subchapter V case — which is available to an individual who owns a small business — to make payments equal to the disposable monthly income for at least three years, and up to five years.

Secured debts — other than those secured solely by the debtor’s principal residence — can be restructured and spread out over a long period of time. As a matter of fact, in that same recent case, I modified a creditor’s secured claim, so that the payment period was 30 years.

There is, of course, the somewhat delicate issue in an individual case of how long the debtor is going to live. For example, if a 75-year-old debtor files for Chapter 11 protection, and wants to restructure a debt to last for 20 years, the Court may be somewhat reluctant to confirm the plan. But in theory a Chapter 11 plan can last almost any length of time. There’s a lot of flexibility.

Sometimes a Chapter 11 plan involves a partial liquidation. In a partial liquidation the plan contains a provision that funds the plan through the liquidation of a particular asset. If the Court approves the sale, then the asset is liquidated in an auction conducted in the Bankruptcy Court. In sum, a Chapter 11, a partial liquidation could lead to a short-lived plan.

You might wonder why the debtor doesn’t sell the asset prior to filing the Chapter 11 petition. Time can be a crucial factor. For example, if a creditor has scheduled a foreclosure sale of the asset, there might be insufficient time for the debtor to sell it prepetition. And even if there were enough time to conduct a sale, a buyer may be reluctant to purchase the asset from the debtor when it could buy the asset for a lower price in the foreclosure sale.

For more information on Chapter 11 bankruptcy, or a Subchapter V Chapter 11 bankruptcy, call (562) 777-9159 for a free 20 minute phone strategy session today.