While an individual may qualify for several different chapters in the Bankruptcy Code, most consumer debtor attorneys only concern themselves with two: Chapter 7 and Chapter 13. Occasionally, a high income debtor needs bankruptcy relief, but is disqualified from Chapter 7 because he makes too much money and has too much debt to qualify for Chapter 13. What can be done?
It’s Chapter 11 to the rescue! Chapter 11 is typically a “business bankruptcy,” however individuals may also file under this Chapter, even when there is no “business” debt. In fact, some debtors choose to file Chapter 11 instead of Chapter 13 when reorganizing personal finances using the Bankruptcy Code. However, as a general rule, individuals choose Chapter 13 over Chapter 11. Here are a few reasons why:
- Chapter 11 has a more expensive filing fee.
- Unlike Chapter 13, Chapter 11 does not have an automatic stay for co-debtors.
- Unlike Chapter 13, Chapter 11 does not contain a statutory authorization for separate classification of debts for which the debtor is co-liable.
- Chapter 11 debtor must get court approval to retain counsel, who must be disinterested. Chapter 13 debtors do not.
- Unlike Chapter 13 debtors, Chapter 11 debtors do not have the right to dismiss the case.
- Plan confirmation is much harder under Chapter 11, because impaired creditors have the right to either accept or reject the plan; under Chapter 13, a creditor’s acceptance of the plan is usually irrelevant.
That being said, there are good reasons to consider Chapter 11 over Chapter 13, including:
- The Means Test does not apply to Chapter 11 bankruptcy cases
- Disposable income under Chapter 11 need only be part of the “property to be distributed under the plan,” which, unlike Chapter 13, need not be distributed solely for the benefit of unsecured creditors, and therefore, can be distributed to administrative and secured creditors.
- The anti-cram down provision of section 1325(a) does not apply in Chapter 11.
- The plan length under Chapter 13 cannot be more than five years, but Chapter 11 has no such limit.
- Chapter 11 plan payments usually don’t start until after confirmation, which can be much later than the filing date; Chapter 13 debtors must begin payments under the plan within 30 days after the filing date, and before plan confirmation.
- As a prerequisite to discharge, a Chapter 13 debtor must complete a financial management course, but there is no such requirement for Chapter 11 debtors.
- Chapter 11 does not require that the debtor have a regular income
- There are no debt limits in Chapter 11
As suggested above, Chapter 11 does not have the same five year time limitation as Chapter 13. To illustrate how this can be useful, consider a debtor who has not paid his mortgage in three years and is now $50,000 behind in payments. If the debtor files Chapter 13, he must cure those payments over five years which could be over $800 each month for the arrears alone. On the other hand, consider the savings if the debtor proposed to repay the arrears in a Chapter 11 plan over eight or ten years!
If you are struggling with debt, speak with an experienced bankruptcy attorney and discuss your options under the federal Bankruptcy Code. The bankruptcy laws are very flexible and offer many ways back to financial health.