How has the Absolute Priority Rule changed in Chapter 11?

Previously, I discussed how one change to Chapter 11 of the Bankruptcy Code opened up the door for middle-class consumers to take advantage of the code in a way traditionally reserved only for the big boys.

Honestly, I am still a neophyte in this realm of bankruptcy, but I have the good fortune to work with an extremely innovative Chapter 11 lawyer who explains this stuff to me.  So, recently I sat down with the Chapter 11 guru of Parker & DuFresne P.A., Brett Mearkle, to discuss Individual Chapter 11.

As Mearkle explains, “In a typical corporate Chapter 11 case, the Bankruptcy Code requires that if the shareholders are going to retain any interest in the reorganized corporation, all general unsecured creditors must be paid in full.  This requirement, known by bankruptcy petitioners as the absolute priority rule, rendered Chapter 11 useless to most individual consumers.

“However, in 2005, BAPCPA amended Chapter 11 of the Bankruptcy Code, effectively eliminating the absolute priority rule for individuals in Chapter 11.  Instead of rewriting the provisions of Chapter 11, however, Congress simply referred to the requirements found in Chapter 13 for plan confirmation.”

Specifically, Bankruptcy Code § 1129(a)(15)(B) now states that, in a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan, the court shall confirm a plan only if the claim is paid in full or if “the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325 (b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.” (Emphasis added.)

“Now,” says Mearkle, “an individual or married couple may confirm a plan proposed under Chapter 11 if the debtor can demonstrate that projected disposable monthly income will be paid to unsecured creditors over an applicable commitment period.  In other words, the individual Chapter 11 debtor, just like the Chapter 13 debtor, need only pay to unsecureds that amount he can afford to pay over the 5-year plan.  Any balances unpaid at the end of the plan period are wiped out by the discharge.”