Why Might an Individual Debtor Opt for Chapter 11?

Chapter 11 bankruptcy is usually associated with business reorganizations, but it is available to individual debtors in certain circumstances. A Chapter 11 allows for a reorganization and partial repayment of debt over time, after which the individual’s remaining debt can be fully discharged. Individuals who may benefit from Chapter 11 include professionals, business owners, people with above-average income and those with assets they cannot exempt in a Chapter 7. 

One reason for choosing Chapter 11 is inability to pass the means test for Chapter 7 eligibility. This complex test measures the debtor’s earnings in comparison with the state median income for their household size. If earnings are above the median, and if the debtor’s total disposable income is enough to pay at least 25 percent of total nonpriority unsecured debt over a five-year period, then Chapter 7 is generally unavailable. However, if total debt consists of more than 50 percent business-related obligations, the debtor may be qualified for pursuing Chapter 7 relief.

If the debtor has sufficient disposable income, Chapter 13 may be an option. Also known as a wage earner’s plan, it allows a debtor to partially pay off unsecured debt over a three- or five-year period and to have the remainder of that debt discharged. However, Chapter 13 has strict debt limits. As of April 1, 2025, if an individual has $526,700 or more in unsecured debts or $1,580,125 or more in secured debts, they are not eligible for Chapter 13. By contrast, Chapter 11 bankruptcy does not have debt ceilings.

Chapter 11 offers these additional advantages over Chapter 13:

• More leniency in plan filing and commencement — In an individual Chapter 11, there is no deadline for filing a plan. Payments do not begin until after the plan is confirmed, which can take several months. By contrast, a Chapter 13 debtor must file a repayment plan within 14 days of the petition and payments usually begin within 30 days of the plan filing.
• 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.
• Flexibility in restructuring secured debt — Through a process known as Section 506 valuation, the court may reevaluate collateral property based on its current fair market value and then bifurcate the creditor’s claim into a secured portion and an unsecured portion. This may allow for modification of secured obligations, such as investment or nonprimary residence property.
• No limit on length of plan — Unlike a Chapter 13 plan, which must be completed within three or five years, a Chapter 11 plan can run for as long as necessary. However, certain debts, like taxes, must be repaid within five years.
• Lesser role of bankruptcy trustee — In a Chapter 11, there is typically no trustee appointed. The individual becomes the “debtor in possession” and is given wide latitude in creating and carrying out the repayment plan. However, they have a fiduciary duty to creditors and to the court.

There are some negative aspects of Chapter 11, such as the need for creditor approval of the plan, higher filing and administrative fees and procedural requirements that include filing monthly reports. Nevertheless, an individual Chapter 11 bankruptcy may ultimately be the best path for people with large debts to remain in control of their assets while working to achieve a fresh start.

For individuals seeking Chapter 11 protection in Southern California, the Law Offices of Michael Jay Berger in Beverly Hills can provide support at every step of the process. Schedule a free initial consultation by calling 310-271-6223 or contacting us online.