Advantages of an Individual Debtor Choosing Chapter 11 Instead Chapter 13

A common misconception is that only businesses can use Chapter 11 for debt reorganization. But in fact, individuals seeking bankruptcy protection can use Chapter 11 to get back on their feet financially by completing a repayment plan over an extended period of time. Chapter 11 can sometimes be a more advantageous alternative than Chapter 13, which has several eligibility requirements and other restrictions.

Choosing between Chapter 11 and Chapter 13 depends on your specific circumstances. Here are some reasons why Chapter 11 might be a better fit:

• No debt ceiling — In a Chapter 11 case, there is no cap on the amount of debt an individual may hold. By contrast, Chapter 13 is available only to individuals with less than $2.75 million in secured and unsecured debt.
• No base income level — Unlike in Chapter 13, there is no requirement in Chapter 11 that the debtor have disposable income sufficient to cover the plan payments. The plan can be funded through the sale of the debtor’s non-exempt assets.
• Lesser role of bankruptcy trustee — In a Chapter 13 case, a court-appointed trustee plays a hands-on role in formulating the repayment plan. In a Chapter 11, there is typically no trustee appointed. The “debtor in possession” is held to the standards of a fiduciary for the benefit of creditors but is otherwise given wide latitude in creating and carrying out the repayment plan.
• Simpler means test — In a chapter 13, a means test is used to establish whether the debtor’s income is above or below the state’s median income. The outcome of the test determines the length of the plan, the size of the monthly payment and how much creditors ultimately receive. By contrast, in Chapter 11, the debtor needs only show his or her current monthly income
• More leniency in plan filing and commencement — In a Chapter 13, the debtor must file a repayment plan within 14 days of filing the petition, and payments usually begin with 30 days of filing. In an individual Chapter 11, there is no deadline for filing a plan, and payments do not begin until after the plan is confirmed, which can take several months.
• No limit on length of plan — Whereas a Chapter 13 plan must be completed within five years, a Chapter 11 plan can run for as long as necessary. However, certain debts, like taxes, must be repaid within five years.

There are downsides to Chapter 11, such as higher filing and administrative fees and more elaborate procedural requirements that include filing monthly reports. Nevertheless, for individuals with a high amount of debt, Chapter 11 can be a more feasible way to remain in control of their finances while working to achieve a fresh start.

The Law Offices of Michael Jay Berger in Beverly Hills represents businesses and individuals in Chapter 11 cases throughout California. Call us at 310-271-6223 or contact me online to schedule a free initial consultation.