Bankruptcy

Why Does a Chapter 11 Cost So Much?

By Brett Weiss, Maryland Bankruptcy Attorney

When I give lectures on individual and small business Chapter 11 cases, I always advise new Chapter 11 attorneys to buy a thick towel for their desk. After I get a confused look from the audience, I explain: “It’s to protect your client’s jaw when it hits your desk after you tell them your fee!”

All kidding aside, Chapter 11 cases are much more expensive than Chapter 7 and Chapter 13 cases. Why?

1. Apart from your attorney’s fees, the filing fee is more than triple that of other chapters. Chapter 7: $299. Chapter 13: $274. Chapter 11: $1,039.

2. Everything is different about Chapter 11’s. They’re not just a “big Chapter 13.” They differ from the very beginning: instead of simply filing your papers as your lawyer, he or she must apply with the Court–and have it approve–the representation during the Chapter 11. Accountants and tax preparers need Court approval too.

3. Chapter 11 cases take a lot more time than Chapter 7 or Chapter 13 cases. Even a simple Chapter 11 case will require a Motion to Approve Attorney, attendance at the Initial Debtor Interview (IDI) with the US Trustee’s office, a (much longer) Meeting of Creditors, preparation and filing of a Disclosure Statement and Chapter 11 Plan (which typically run about 100 pages), attendance at the Disclosure Statement Hearing, solicitation of votes from creditors and submitting ballots, attendance at the Confirmation Hearing, etc. All of these things take a lot of time, and since virtually all Chapter 11 cases are handled on an hourly basis, this means that they cost a lot.

4. Chapter 11 cases usually require more negotiations with creditors. In a typical Chapter 13 case, provided all payments are made and the claims are proper, it is not unusual to never speak with a creditor or creditor’s attorney. This rarely is the case in Chapter 11 cases. Soliciting votes, working out adequate protection orders, possibly having to file a cash collateral motion–all of these are typical in a Chapter 11.

5. Chapter 11 cases are far more confusing for clients. Many Chapter 7 and 13 cases are fairly straightforward, and follow fairly typical paths, and it is relatively easy for your attorney to explain what’s going on and why. It is far more difficult to explain arcane legal concepts such as the “Absolute Priority Rule,” “Cash Collateral Motions,” “Adequate Protection,” “Cramdowns (of creditor objections to Plans)” and the like.

6. Your attorney needs to work with you on monthly business reports and quarterly trustee payments.

7. There are very few attorneys who handle individual and small business Chapter 11 cases. Most consumer bankruptcy attorneys won’t touch Chapter 11 cases with a ten foot pole. (I get many of my Chapter 11 cases from referrals from other consumer bankruptcy attorneys.) And few business bankruptcy attorneys can make enough money handling individual and small business cases to make it worth their while.

Full post as published by Bankruptcy Law Network on July 05, 2010 (boomark / email).