Consumer Chapter 11: When Big Bankruptcies Get Personal

Whether it's "Mr. Las Vegas" or crazy actors, celebrities always seem to have financial troubles. That's part of what makes them so entertaining. Understandably, the large amounts of money they make (and owe) can sometimes push them into consumer bankruptcies of the Chapter 11 variety. But it turns out that this is not the exclusive territory of the rich and famous. In fact, every lawyer should be aware of how Chapter 11 is playing out today-after all, you might just end up representing a debtor or creditor very soon.

Bet the Farm, Keep the House

One reason that even normal, non-celebrity people are interested in consumer Chapter 11 is housing. A few years ago when housing prices were high, many borrowed against their home equity with multiple mortgages, betting that housing prices would keep going up. They did not.

Today, with more than one in four U.S. mortgages still underwater, this is still leading to bankruptcies (though the situation is getting better now). If the homeowners' secured debt exceeds $1,081,000 or their combined unsecured debt exceeds $360,475, and they want to keep their house, Chapter 11 becomes their only bankruptcy option because of limits on the amount of debt allowed in Chapter 13. Unlike those filing individual Chapter 7 bankruptcies, debtors under Chapter 11 are often able to keep their homes, sometimes eliminate their junior mortgages, and restructure other secured debts. That sounds really good for the debtors, doesn't it? Well...

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