Document Type

Research Memorandum

Publication Date




Under the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii), a reorganization plan that gives a junior class of creditors an interest in the estate will not be confirmed unless each senior class receives full payment or gives its consent. The absolute priority rule was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) by adding an exception that allows individual chapter 11 debtors to retain property included in the estate under newly added section 1115. This amendment furthers the congressional intent of allowing chapter 11 to function more like chapter 13, under which there is no absolute priority rule for individual debtors.

Recently, in In re Tegeder, In re Roedemeier, and In re Bullard, bankruptcy courts have interpreted this amendment as creating an exception to the absolute priority rule for individual chapter 11 debtors, as retention of pre-petition property and post-petition property and earnings is now acceptable. The exception to the absolute priority rule has also effected unsecured creditor protection. The absolute priority rule must be met in order for “cram down,” the confirmation of a reorganization plan over an impaired class’ rejection of the plan, to occur. Before the amendment, “cram down” could not occur if an individual debtor retained property. However, the negotiating ability once offered to unsecured creditors under the absolute priority rule has disappeared. Since the BAPCPA amendment, confirmation is permitted when an individual retains pre-petition property and post-petition property and earnings, even over the objections of unpaid unsecured creditors. Still, some protection for unsecured creditors may remain under the chapter 11 disposable income requirement of section 1129(a)(15). Section 1129(a)(15), which mirrors section 1325(b)(2) for chapter 13, requires the value of property distributed under the plan be no less than the unsecured claim or the commitment of disposable income over at least five years.


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