Why an Individual Debtor Might Benefit From Chapter 11
Financially distressed companies are able to utilize Chapter 11 to restructure debt and reorganize operations with the goal of regaining solvency. Although it is not commonplace, individuals can also file for bankruptcy under Chapter 11, and sometimes this is the best option.
Chapter 7 and Chapter 13 are the most popular bankruptcy options for individuals facing insurmountable debt. Chapter 7 is usually preferable when the debtor has few assets, a modest income and a large amount of unsecured debt, such as credit cards and medical bills. It usually results in a full discharge of this debt. Chapter 13 is often the best choice when debtors have debts secured by assets they want to keep after bankruptcy, such as a home. The debtor must pay off a portion of outstanding debts monthly over a three- or five-year period, after which any remaining unsecured debts are discharged.
However, both Chapter 7 and Chapter 13 have eligibility requirements. Individuals who file under Chapter 7 generally must pass a “means test,” which evaluates the debtor’s financial position and family circumstances in order to determine whether they can repay some of their debts. A debtor who fails the test is barred from filing Chapter 7. By contrast, Chapter 13 is designed for wage earners who have sufficient disposable income to repay some of their debt. But in order to qualify for Chapter 13, the individual’s total debt cannot exceed $1,395,875 (a ceiling that is subject to adjustment).
For people whose income is too high to pass the Chapter 7 means test and who have too much debt for Chapter 13, Chapter 11 offers a third alternative. It is a form of debt reorganization similar to Chapter 13. The debtor pays creditors monthly in accordance with a court approved plan lasting up to five years. The plan details how the debtor will repay some of his or her outstanding debts. In most cases, the debtor will be able to keep the bulk of their assets through the use of statutory exemptions.
There are a few disadvantages to opting for Chapter 11. For one, unlike in Chapter 13, the proposed repayment plan must be approved by a majority of creditors in order to be confirmed. For another, dischargeable debts are canceled only at the conclusion of the plan, which means that if the plan fails for any reason, any debts remaining become due and payable. Chapter 11 is also more expensive in terms of court filing fees and more time-consuming than other forms of personal bankruptcy. Nevertheless, a successful Chapter 11 results in the discharge of most of the individual’s debt and provides the ability to rebuild their credit rating.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s largest bankruptcy firms, with 12 locations in the region. If you are financially overwhelmed, contact us online or call 310-271-6223 to schedule a free initial consultation.