Why More Chapter 11s?
When the 2005 bankruptcy law was adopted by Congress it created a new “means test” that borrowers had to pass to qualify for a Chapter 7.
Congress limited this requirement only to debtors with primarily consumer debt.
Debtors who had incurred most of their debt from a failed business could avoid having to pass the means test in order to file Chapter 7.
The provision allowed business debtors to file Chapter 7 even though their budget might have shown substantial income.
A Nebraska bankruptcy court was correct when it approved the forced conversion of a Chapter 7 to Chapter 11.
This was for a debtor who had primarily non-consumer debt but whose budget showed substantial disposable income.
The Court’s decision raises serious implications for debtors who might need to file bankruptcy because of a failed business.
The decision will hopefully be appealed but unless overturned by a higher court.
This decision may lead to more debtors having to use Chapter 11 to eliminate debt from a failed business.