Are You a Candidate for an Individual Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is not just for large corporations; individuals can also file Chapter 11 to achieve freedom from overwhelming debt. If an individual can afford the legal fees, a Chapter 11 bankruptcy offers many advantages over a Chapter 13.
Chapter 11 Is Not Just for Corporations
Chapter 11 is not only for companies suffering overwhelming debt problems. Under to Section 109(d) of the bankruptcy code, a person that may be a debtor under Chapter 7 (which is any individual) may also take advantage of the beneficial provisions in Chapter 11 to overcome their unmanageable debt issues. Many higher income individuals will file a Chapter 11 if they fall outside the debt limits for Chapter 13. The current Chapter 13 debt limits are $1,081,400 for secured debt, and $360,475 for unsecured debt. If you owe more than this in either category, you will have to file an individual Chapter 11 to propose a plan of reorganization to repay your creditors over a period of time. While many people with primarily business debts will be able to file a Chapter 7, regardless of income, Atlanta, Georgia Judge Wendy Hagenau recently ruled that an individual with primarily business debts who files a Chapter 7 and has a very high level of disposable income may be forced into a Chapter 11. Regardless of which Chapter you file, it is imperative that you consult with an experienced bankruptcy attorney prior to filing.
Why File an Individual Chapter 11
Traditionally, people filing Chapter 11 bankruptcy do so because they have exceeded the debt limits for a Chapter 13 bankruptcy. For instance, many celebrities and professional athletes are required to file a Chapter 11 rather than a Chapter 13 because they have far too much secured and unsecured debt. However, there are also a number of benefits in filing a Chapter 11 for people who would otherwise qualify for a Chapter 13.
1. Stretch Out Pre-petition Mortgage Arrearage Payments: If you want to keep your primary residence in bankruptcy and are behind on your mortgage payments, you cannot file a Chapter 7 to prevent the loss of your home. Chapter 13 will help most debtors; however, one of the limitations of Chapter 13 is that all your mortgage arrears must be paid within a 5 year period in equal monthly payments. If your haven’t made a mortgage payment in over a year, it can be very difficult to maintain your regular monthly payment in addition to an amount each month that will pay off your arrears within the statutory five year period. With a Chapter 11 bankruptcy, you are not bound by this 5 year limit and can stretch out the cure period for a significantly longer time period.
2. Cram-Down of a "910" car: In bankruptcy, a creditor’s lien can be reduced to the fair market value of the property securing it. For instance, if you owe $150,000 on a rental property that is worth only $100,000, your balance will be reduced to $100,000. There are certain limitations on the debtor’s ability to take advantage of this, and one such limitation is governed by the “hanging paragraph” in Chapter 13. The “hanging paragraph” represents a paragraph in Chapter 13 of the bankruptcy code providing that any car financed within 910 days of the petition date cannot be crammed down to the value of the vehicle. This limitation does not exist in Chapter 11. So if John Smith finances a $45,000 truck in 2010, owes $35,000 by 2012, and files a Chapter 13 that same year, he will have to pay the entire $35,000 balance over the life of the plan. If he files a Chapter 11 and can prove that the truck is only worth $20,000, he will only have to pay back $20,000 through the Chapter 11 Plan. This results in a savings of over $15,000 over five years – a significant amount of money for John.
3. Recent Discharge in Chapter 7 or Chapter 13 Case: If you have received a discharge in a Chapter 7 case within 4 years of the petition date or a discharge in Chapter 13 within 2 years of the petition date, you cannot receive another discharge in Chapter 13. But even if you just received a discharge under either Chapter, you can still file a Chapter 11 bankruptcy and receive a discharge once you complete all payments under the Plan.
4. Non dischargeable Debts (Payroll Taxes, Domestic Support, Etc): Chapter 11 can give an individual the time needed to properly reorganize their affairs for liabilities considered non dischargeable under the bankruptcy code. Non dischargeable means the debt will not be wiped out in bankruptcy. Among the debts that will survive bankruptcy are payroll taxes. Payroll taxes are serious business, and if your business fails to pay these taxes, you can be held personally liable. Fortunately, filing Chapter 11 will stop any penalties and fees from accruing on these unpaid taxes, and your attorney can work with the IRS to structure a repayment plan or settlement offer that you can afford.
ABOUT THE AUTHOR: Will B. Geer
Will B. Geer is an Atlanta bankruptcy attorney who specializes in helping individuals and consumers overcome unmanageable debt. Will particularly enjoys helping individuals who do not qualify for Chapter 13 bankruptcy protection propose a plan of reorganization through a Chapter 11 bankruptcy.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.