Potential Change in Chapter 11 Bankruptcy Rules


Chapter 11 Bankruptcy Rules

The start of the New Year brings with it the promise of fresh starts and change.  The American Bankruptcy Institute (ABI) is also hoping for change.  At the end of 2014, it released a 400+ page final report on proposed changes to the Chapter 11 bankruptcy rules.  As discussed in greater detail in previous posts, Chapter 11 is a reorganization form of bankruptcy most commonly used by businesses and high net worth individuals.  The report took three years to create and is the work of 18 of the most well-known authorities on Chapter 11 bankruptcy rules with the support of multiple committees and over 200 professionals.Chapter 11 Bankruptcy Rules

Why Changes in Chapter 11 Bankruptcy Rules are Needed

The report notes that bankruptcy law overhauls seem to take place approximately every 40 years and we’re due.  Business practices evolve and if Chapter 11 bankruptcy rules aren’t updated, they lose their effectiveness and don’t meet the goals of economic stimulation and business rehabilitation.  The ABI report claims that there is anecdotal evidence that this has begun to occur and that particularly for small and mid-sized businesses, the process itself has become prohibitively expensive.

Key Proposals to Changes in Chapter 11 Bankruptcy Rules

The lengthy report contains countless proposed changes that address each step of the Chapter 11 bankruptcy process but a few key themes can be extrapolated.  The proposals seek to encourage the use of alternative and additional restructuring schemes particularly for small to medium size enterprises.  They also seek to give debtors more breathing room at the beginning of the case by among other things, the sale of assets and setting case milestones in debtor in possession orders would be prohibited.  Try to better balance the comparative rights of Chapter 11 debtors and their creditors (though, some secured creditors believe they would be more harmed than benefited from the proposed changes).
Some of the most significant and controversial proposals relates to debtor in possession (DIP) financing.  Under the proposed changes to Chapter 11 bankruptcy rules, roll-ups would be prohibited in most situations.  Rollup financing is a type of financing under which a pre-bankruptcy petition creditor is able to obtain priority status by “rolling up” its pre-petition loan(s) with financing given to the debtor after the bankruptcy petition was filed.  The process effectively allows certain creditors to jump the line, which many view as unfair.
Closely related to the concept of roll-ups is the “adequate protection” requirement.  Under certain circumstances, a Chapter 11 debtor must their secured creditor with “adequate protections” of the creditor’s property.  Such protection comes in different forms – cash payments, additional liens, and other just relief.  What constitutes adequate protection depends on the value of the creditor’s interest.  The ABI report proposes that the value be determine based on the foreclosure value of the interest, not the going concern value currently used.  In most cases, this would lower the amount of assurances required.

 Changes to Chapter 11 Bankruptcy Rules Would Impact Floridians

Since bankruptcy proceedings are largely governed by the federal Bankruptcy Code, with a few state law distinctions, any changes to Chapter 11 bankruptcy rules would impact individual and business debtors in Jacksonville and across Florida.  Any changes will take time.  If you have questions about how to most effectively utilize current bankruptcy laws, contact the Jacksonville chapter 11 bankruptcy attorneys at Adam Law Group.