Supreme Court rules individuals have right to file for 'Chapter 11' bankruptcies

June 14, 1991|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- The Supreme Court gave consumers who are deeply in debt a new legal right yesterday to try to work their way out of bankruptcy without losing almost all control over their financial affairs.

The court, with only one justice dissenting, ruled that a part of federal law regularly used by businesses to keep operating after going bankrupt -- so-called "Chapter 11" -- may be used by consumers, too.

Up to now, individuals whose debts had risen beyond their means have often gone bankrupt by filing, or being forced to file, under the law's Chapter 7. In that kind of proceeding, most of a consumer's assets are taken away immediately by a court officer and divided up among creditors according to a set list of priority payments. Nearly every asset the person holds -- except the home and wages -- can be taken away, and he has next to nothing to say about who gets paid and how much.

Another method, used by fewerconsumer debtors, is a "Chapter 13" case, in which a debt-ridden individual who has a regular income can ask a court to be allowed to hold onto personal assets and only enough money to live on while paying off at least some debt by installment. To be eligible, the consumer can have no more than $100,000 of debts not backed up by some security.

For an individual with "unsecured" debt of more than $100,000, the only option has been to go the Chapter 7, or "liquidation," route.

After yesterday's ruling, however,individuals who have heavy debt may do as business firms do under Chapter 11 and work out with creditors a plan to reorganize their debt, fashioning payment plans so that creditors get at least part of their money back. Creditors have veto power over such a plan and ordinarily will insist that they get as much back as they would have if the bankrupt had filed under Chapter 7.

Under Chapter 11, the individual's spendable income and personal property are not taken away. The obligation assumed is simply tomake payments as promised.

The path opened by the new ruling is more complex and costs more to pursue, and thus, the court said, is likely to be used only by those consumers with quite heavy debt loads.

The court's ruling came in the case of Sheldon B. Toibb, an out-of-work lawyer and businessman in St. Louis who had run up more than $170,000 in unsecured debt. He sought to pursue bankruptcy under Chapter 11, but a federal court said that, since he was not a business debtor, he could not do so.

The Supreme Court overturned that ruling, in the case of Toibb vs. Radloff (No. 90-368), saying that "Congress knew how to restrict recourse to the avenues of bankruptcy relief" yet "did not place Chapter 11 reorganization beyond the reach of a non-business individual debtor."

Only Justice John Paul Stevens dissented from the ruling, written by Justice Harry A. Blackmun.

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