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Individual Chapter 11 Bankruptcy: Why Is It So Hard To Find a Lawyer?

By Brett Weiss, Maryland Bankruptcy Attorney

Say the words “Chapter 11″ to most consumer bankruptcy attorneys, and after an initial look of fear in their eyes, you will quickly receive the name of one of the few attorneys in your state that actually handles individual and small business Chapter 11 bankruptcy cases. Why is this the case?

The reasons lie in history, economics and legal practice. Note that my comments in this blog are specifically intended as generalizations, particularly as they refer to the consumer bankruptcy bar. There are many exceptions to the broad brush strokes I use.

History: Bankruptcy was established primarily as a means for creditors to force the liquidation of businesses who were in default in their payments. The early Bankruptcy Acts of 1800, 1841 and 1867 were enacted to deal with economic crashes and were heavily tilted in favor of creditors, with creditor approval and minimum dividends an integral part of the law. With the passage of the Bankruptcy Act of 1898, corporations were excluded from coverage, although partnerships were not. This was remedied in 1910, when corporations were made eligible for bankruptcy relief.

In 1938, the Chandler Act added a number of chapters to the Bankruptcy Act that applied solely to business entities, including new Chapters 10 and 11.

In the Bankruptcy reform Act of 1978, which established the framework that we follow to this day, it was expected that most individual reorganizations would take place under Chapter 13, and Chapter 11, as under the Chandler Act, was made primarily a business chapter. In fact, the Supreme Court stated as recently as 1990, in the case of Toibb v. Radloff, 501 U.S. 157 (1990), “Chapter 11…was primarily designed to provide relief for corporate debtors but also unquestionably authorizes relief for individual proprietors of business enterprises. When the statute is read as a whole, however, it seems quite clear that Congress did not intend to authorize a “reorganization” of the affairs of an individual consumer debtor.

Nevertheless, since that time, Courts have recognized and allowed individual, non-business debtors to file for Chapter 11 reorganization. But the structure is primarily that of business, and the procedures set up allow megaliths such as Lehman Brothers, Enron and WorldCom to reorganize are, to put it mildly, overkill for a couple with a house and investment property that owe too much to qualify for Chapter 13.

Economics: Flat fees without fee applications are the norm for Chapters 7 and 13–consumer bankruptcies. Hourly fees are the norm for Chapter 11 cases. As a result, most consumer bankruptcy attorneys do not keep hourly time records in consumer cases, and the strict timekeeping requirements and mandatory fee applications of Chapter 11′s are a significant departure from their normal procedures. Chapter 11 cases are also very time consuming, and require much attorney time. Chapter 11 cases often involve creditor litigation and multiple hearings. The procedures, both written and unwritten, also differ significantly from Chapter 7 and 13 cases. There is a great deal of time, study and work that is required to be able to properly represent Chapter 11 debtors, and for many consumer bankruptcy attorneys, it makes neither intellectual nor economic sense. Attorney time is a precious commodity, and many consumer bankruptcy law firms have large swaths of case work handled by paralegals, with attorney time minimized. This simply cannot be done in a Chapter 11, and many consumer bankruptcy attorneys believe that their time is more productively spent handling more, smaller, flat fee cases instead of fewer, larger hourly Chapter 11 cases.

And lawyers who handle large corporate Chapter 11 cases can’t make enough money representing individuals and small businesses in Chapter 11 to make it worth their while.

If you are looking at a possible Chapter 11, make sure that your attorney handles individual cases regularly.

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Full post as published by Bankruptcy Law Network on October 04, 2010 (boomark / email).