The Chandler Act

The last pervasive revision of the bankruptcy laws before the enactment of the Reform Act was the Chandler Act of 1938. The Chandler Act was an amendment to the Bankruptcy Act of 1898, and made a number of substantive changes in the straight bankruptcy provisions of Chapters I through Chapter 7. By far its most sweeping changes were in the rehabilitative provisions for business and consumer debtors set forth as Chapters X through Chapter 13 of the amended Act. Chapter X was an offshoot of § 77B, containing much of the same language together with new investor protection provisions in response to some obvious shortcomings of § 77B suggested by many lawyers. Chapter 10 bankruptcy was restricted to corporate debtors, was intended for situations where a major restructuring was necessary, and was not available where Chapter 11 would suffice.

Somewhat different in its origins, Chapter 11 bankruptcy was based on § 12 of the 1898 Act and was an attempt by lawyers to apply the principles of simple compositions and extensions to business debtors, whether or not corporate in form. Chapter XI had a rather simple concept and, at least in theory, it did not permit the rights of secured creditors and shareholders to be altered or modified. While Chapter 11 did not have an automatic stay in the statute, courts commonly entered restraining orders at the outset of the case and later in its history bankruptcy Rule 11-44 provided an automatic stay. In the ordinary case, management was not displaced as it was in cases under Chapter 10. For this reason, and for its simplicity and relatively speedy results, Chapter 11 bankruptcy was favored greatly over Chapter 10 by both debtor and their lawyers, and creditor interests. Lawyers often created substantial litigation  over whether Chapter 10 bankruptcy or Chapter 11 bankruptcy was the appropriate forum for a particular debtor, with an occasion demise of the patient while the lawyers litigation was being resolved.

Chapter 12 bankruptcy was an anomaly, developed to meet a special situation found in Illinois. It was available only to non-corporate debtors owning real property or chattels real which were security for debt and was intended for debtors with real property debt problems. Until the 1970's Chapter 12 bankruptcy was rarely used and hence had become increasingly archaic and had virtually case law. Its statutory language was a peculiar blend of Chapter 10 and Chapter 11 concepts owing more to the former than the latter. The difficulties of real estate tax shelter ventures in the years immediately prior to the adoption of the Reform Act led to a modest surge in popularity for Chapter 12 bankruptcy, since under Chapter 12 bankruptcy the rights of a secured creditor could be modified in the plan.

Consumers were the intended beneficiaries of Chapter 13 bankruptcy although the chapter was available to any wage earner. Chapter 13 also reflected the inadequacies of the Act as a consumer debtor relief statute since it provided little assistance to debtors whose financial problems included secured debt. On the other hand, the stay power of the court often gave a Chapter 13 bankruptcy debtor with substantial secured creditor debt an opportunity to catch his without losing vital assets which would have been expensive to replace. This alone made Chapter 13 bankruptcy quite popular in some parts of the country.

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