What Is an Individual Chapter 11 Bankruptcy?

If you have significant assets or debt you might receive a better outcome under Chapter 11 than Chapter 7 or 13 bankruptcy.

A Chapter 11 bankruptcy case is a court-supervised process that encourages you and your creditors to work toward an agreement called a “plan of reorganization” that will help make your debt payments more affordable. Although businesses usually file for Chapter 11 bankruptcy, individuals with too much income to qualify for Chapter 7 bankruptcy or too much debt to qualify for Chapter 13 bankruptcy can file a Chapter 11 case, instead. As with any other chapter, filing will delay collection actions, giving you time to negotiate agreements to make more manageable payments over time.

Why Should I File for Chapter 11 Bankruptcy Instead of Chapter 7 or 13 Bankruptcy?

It’s unlikely that you’ll choose to file for Chapter 11 bankruptcy. Most people do so only after failing to qualify for another chapter. Not only is it a more complicated chapter to negotiate, but it requires more attorney time to prepare so it costs more. For instance, in addition to attorneys’ fees, you can expect to pay the following:

  • $1,717 filing fee (as of September 2016)
  • $250 or more each quarter for U.S. Trustee fees, and
  • the cost to prepare and mail your plan of reorganization, disclosure statement, and creditor voting ballots.

Even so, Chapter 11 bankruptcy might be the right choice if your disposable income is too high to qualify for Chapter 7 bankruptcy, and your debts exceed the Chapter 13 bankruptcy limits. Other property benefits potentially exist under Chapter 11 bankruptcy—such as reducing the amount owed on a car purchased less than 910 days before filing bankruptcy to its actual value—but it’s likely that the savings won’t outweigh the cost.

Here’s a brief description of the chapters you’ll want to rule out before filing your Chapter 11 case—although keep in mind that a local bankruptcy attorney will be in the best position to determine whether filing for Chapter 11 bankruptcy makes sense for you.

Chapter 7 bankruptcy. Sometimes called “straight liquidation,” Chapter 7 bankruptcy provides relief for people with the most serious financial hardships. To qualify for a Chapter 7 case, you must pass a “means test,” proving that your disposable income is too low to allow you to make meaningful payments to your creditors. A bankruptcy trustee will calculate your disposable income by comparing your actual income to the median income in your state, then subtracting your reasonable expenses. If you qualify, the trustee will sell most of your non-essential assets (called “nonexempt” assets) to pay creditors, and you will receive a discharge of your qualifying debts.

Chapter 13 bankruptcy. If you do not qualify for Chapter 7 bankruptcy, you might be able to file a Chapter 13 case. You’ll file a simplified plan of reorganization that uses your available income to pay as much as you can to creditors over three to five years, after which you’ll receive a discharge of qualifying debts (the remaining balance gets wiped out). To qualify for Chapter 13 bankruptcy your debts cannot exceed certain limits, which are $1,184,200 in secured debts (such as a mortgage or car payment) and $394,725 in unsecured debts (debts that aren’t backed up by any property, such as most credit card debt).

How Does Chapter 11 Bankruptcy Work?

Once you file for Chapter 11 bankruptcy, you will immediately get the benefit of the “automatic stay” (an order that prohibits your creditors from taking any actions to collect from you). Any lawsuits or other debt collection efforts will come to a halt, giving you a “breathing spell” to negotiate with your creditors on a repayment plan. The automatic stay remains in effect until the court approves your plan of reorganization.

Negotiating With Creditors

After you file your Chapter 11 case, you’ll disclose your income, assets, and debts on official bankruptcy forms, and begin negotiating your reorganization plan with your creditors. If you’re wondering why your creditors would be willing to negotiate with you, it’s because they know that if they’re too aggressive, they might force you into Chapter 7 liquidation and receive little or nothing at the end of the day.

Preparing Your Plan of Reorganization

Unlike a standardized Chapter 13 plan that requires you to pay a particular amount to certain types of creditors, a Chapter 11 reorganization plan is a customized document designed to solve your unique financial problems. Your job as a Chapter 11 filer is to propose a plan that preserves your most important assets while allowing you to pay your debts over time using your available income.

(To learn more about plan requirements, read What Goes Into an Individual Chapter 11 Plan and Disclosure Statement?)

Voting and Confirmation of Your Plan

Once you have negotiated the best plan you think you can manage, you will file it with the court and your creditors will vote on whether to accept or reject the plan.

Not all creditors will negotiate easily. In some cases, a reluctant creditor won’t agree to a reasonable restructure of its claim and will vote “no” on the plan. In such cases, you might be able to “cram down” a plan over the creditor’s objections, if you can prove to the judge that your proposed treatment of that creditor’s claim is fair and reasonable.

To be confirmed (approved by the court), a Chapter 11 plan must be accepted by at least one-half of the number of creditors in each class of claims, and two-thirds of the dollar amount of claims in each class. Once accomplished, you’ll receive a court order confirming your plan of reorganization.

Discharge of Your Debt

Once you’ve completed your payment obligations under the plan you’ll receive a discharge of all remaining debts. However, if you fail to complete the plan as agreed, you’ll remain responsible for the balances on any outstanding obligations.

Questions for Your Attorney

  • Do I need to file for Chapter 11 bankruptcy?
  • Will this court allow me to keep my property if I don’t pay my debt in full under my plan?
  • What can I do if one of my major creditors refuses to negotiate and rejects my plan?
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