Chapter 11 Bankruptcies for the Individual Debtor

Chapter 11 can produce a better result for some individual debtors than Chapter 13.The first step in the filing of a bankruptcy is to choose the chapter of bankruptcy to file. Careful analysis by a competent attorney can produce a more optimal result for the debtor.

There are two major types of bankruptcy cases. These types are the liquidation and the reorganization. Liquidation or Chapter 7 at its most simple is the orderly surrender of non-exempt assets to a bankruptcy trustee. The debtor must be eligible for Chapter 7.The debtor’s assets are sold and creditors receive the proceeds after the expenses of administration of the case are paid. . The debtor keeps the exempt property No payments are made to creditors by the debtor in a Chapter 7 case. Therefore, it is not possible to cure a default in a secured debt such as a car loan or mortgage. However, the asset can be surrendered and the debt discharged.

The second type of bankruptcy is reorganization. Reorganization requires a plan of reorganization, a formal document, to reorganize the debts of the debtor. The plan must be feasible and must be proposed in good faith. The plan of reorganization, hereinafter “plan”, provides an orderly payment to creditors based upon their priority under the bankruptcy law. Think of a chicken soup the day after it was made. The soup contains a top layer of fat, a layer of clear soup, and a layer of solids. When you skim all of the fat before serving the clear portion of the so you understand the manner in which a plan of reorganization works to pay creditors based upon their class. Make written specific terms in the removal of the layers of soup, such as remove the lid, do not heat the soup before removing the layer of fat and you understand that the treatment of the claims of creditors are carefully disclosed in the plan of reorganization. Reorganization can treat different classes differently. However, the creditors in the same class must be treated equally. All reorganizations must provide the unsecured creditors with as much as would have been received if the debtor had files Chapter 7.

There are three types of reorganizations commonly filed. These types are Chapter 11, Chapter 12, and Chapter 13. Chapter 12 typically applies to farmers and is not considered in this article. Chapter 11 was originally designed to provide bankruptcy relief for large businesses and wealthy individuals needing to reorganize debts. Individual debtors usually file Chapter 13. This type of bankruptcy can be used by an individual owning a business or a consumer with financial difficulties. .

The Chapter 13 procedural rules are streamlined to efficiently process this type of bankruptcy. A Chapter 13 can be used to cure secured debts that are in default or can be required to be filed because the debtor was ineligible for Chapter 7 and must file a type of reorganization. Chapter 13 cases are administered by a Standing Chapter 13 Trustee appointed by the U.S. Bankruptcy Court. The trustee applies the rules to the plans administered and disburses the funds paid in the plan to creditors.

Chapter 13 cases must be confirmed by the court. The plan of reorganization must be proposed in good faith, the creditors must be provided for in the plan of reorganization, the plan must be feasible, and must represent the debtors’ best efforts to pay available income to his creditors. The order of confirmation makes the plan of reorganization binding upon all of the creditors and the debtor. Not all individual debtors are eligible for the filing of Chapter 13. Chapter 13 has an upper limit on secured debt and unsecured debt. The limit is presently ___for secured debt and_____ for unsecured debt. Cases that exceed the debt limits must be dismissed or converted to another chapter of bankruptcy.

Failure to pay plan payments or achieve confirmation will result in the case being dismissed. The bankruptcy case will no longer exist and the creditors may collect their debt. The bankruptcy stay will be no longer in existence.

Chapter 13 is streamlined for administration of a large number of cases simultaneously. The plans of all of the debtors use the same forms. The plans are uniform in their classification of creditors’ claims. The order of confirmation does not require a vote by the creditors. The Chapter 13 cases are administered by the court on larger dockets.

The two principal advantage of Chapter 13 over Chapter 11 is the relatively low cost of the filing fee and attorney fees and the streamlined procedures for the handling of large numbers of Chapter 13 cases. The major disadvantage is in the calculation of the available income of the debtor as compared to Chapter 11.

Bankruptcy reform became effective in 2005. The reform was designed to require Chapter 13 debtors to apply the IRS standards for collection of tax debt to the calculation of the amount of a debtor’s income applied to the plan of reorganization plan payments if the debtor’s income was above the mean income for that size family for the state. The IRS standards are based upon a very low standard of living. This can cause significant disruption and many debtors are unable and unwilling to change their life so significantly. The chances of successfully completing the case diminish even if the debtor proceeds

The income of the debtor determines the duration of the Chapter 13. Debtors with income below the mean for that size family in the state will repay their creditors over a period of 36 months. The 36 months can be extended to 60 months if cause exists. The debtors with income below the mean for the state use their actual budget to determine available income to be devoted to the plan of reorganization. Chapter 13 favors debtors having income below the mean income for the state.

Debtors having annualized income over the prior six months in excess of the mean for that size family in the state are required to repay their creditors over a 60 month period. Additionally, the calculation of available income is different than for the lower income debtors. The Current Monthly Income is designed to apply and limit expenditures in the debtors’ budget by applying the IRS collection standards. This can greatly increase the amount required to be paid monthly as a plan payment and can greatly increase the amount unsecured creditors receive in the bankruptcy. Many debtors contemplating Chapter 13 as a remedy for their debt problems are unable to stomach that high a payment and accept the consequences of not being able to reorganize under Chapter 13.

Chapter 11 was originally designed to be able to handle the complex cases of corporations such as G.M., Chrysler, and the Texas Rangers. This chapter is also designed to handle the complex problems of individual debtors with large amounts of debt. The design of this type of bankruptcy can produce less disruption in the calculation of plan payments for individual debtors than a Chapter 13 case. This is because the second calculation required of an individual with income in excess of the mean for the state does not have to apply the IRS standards in calculating available income. This can justify the additional cost of a Chapter 11. The calculation of income can make the additional procedural paperwork and uncertainty of confirmation worthwhile. I have confirmed Chapter 11 cases for individuals with substantial tax debt and businesses that would have required full payment of all creditors in Chapter 13 because of the application of the CMI calculation. This difference resulted in a plan that the client could accept and was approved by the Court and creditors.

Chapter 11 requires a filing fee of $1039. This is nearly four times greater than the $274 filing fee required in Chapter 13. Chapter 11 requires many procedural motions and confirmation of a plan of reorganization requires the approval of at least one class of creditors. Attorney fees are normally far more costly than in Chapter 13.

Other advantages of Chapter 11 is a longer duration is possible than in Ch. 13. Creditors can agree to payments that are longer than in Chapter 13. Plan payments may be delayed until confirmation. Debtors will be required to pay secured creditors adequate protection payments until confirmation. This protects the creditor from diminution in value of their collateral.

Debtors can not receive a discharge in Chapter 11 until completion of the plan of reorganization. Debtors can design plans that classify creditors to allow for easier confirmation within reasonable limits. Debtors are required as the debtor in possession to assume most of the responsibility of the Standing Chapter 13 Trustee to disburse funds to the creditors and administer the plan. Confirmation of the plan of reorganization requires approval of at least one class of creditors and of the court.

Chapter 11 can be effectively be used by some consumers and may effectively work for individuals having small businesses in financial difficulty. The obvious choice is often Chapter 13. Looking deeper can reveal another option, Chapter 11. Careful planning by a competent attorney can help determine the best choice for the debtor. . Emergency cases seldom produce the best results. Sometimes conversion to a different Chapter is required. Careful planning can produce a resulting plan that better fits the needs of the debtor.

This article is not intended to provide legal advice and may not be relied upon to provide advice. The article is intended to be used fir educational purposes and is not intended as an exhaustive analysis of bankruptcy law. Copyright ©2011 William F. Kunofsky, All Rights Reserved.