Chapter 11: What If I Don’t Qualify for Chapter 7 or Chapter 13?
If you make more than the median income for your household size and cannot pass the Means Test, you may be unable to qualify to file bankruptcy under Chapter 7. Most debtors who do not clear these two hurdles will then opt for filing under Chapter 13. They will also perform a Wage Earner Plan for the next five years. However, there are limits on who can file under a 13. Effective through all of 2018, the debt limits for filing chapter 13 bankruptcy under section 109(e) of the Bankruptcy Code are:
- Total unsecured debt (credit cards, medical bills, utilities, etc.): $394,725
- Total secured debt (house, vehicle and other collateralized obligations): $1,184,200
If you cannot file under either Chapters 7 or 13, you will be left with Chapter 11 as your only other bankruptcy option.
Benefits of Chapter 11 Over Chapter 7 or 13
There Are No Time Limits
In Chapters 7 and 13, there are specified waiting periods one must observe before re-entering bankruptcy. Not so under Chapter 11. If you have recently received a discharge under another chapter, there is no time limit to prevent you from filing under Chapter 11.
You Can Extend the Period Over Which Mortgages May Be Paid
In a Chapter 13 case, the plan must propose to pay the entire mortgage arrearage over five years. A Chapter 7 doesn’t address your past due mortgage payments at all. However, a Chapter 11 plan can stretch your payback period to longer than a mere five years and, in some cases, provide a better cash-flow solution to deal with a foreclosed or soon-to-be-foreclosed home.
If You Have Non-Dischargeable Debts
Occasionally, we come across a situation where non-dischargeable debts must be dealt with in the context of a bankruptcy. For example, unpaid payroll taxes can become a personal obligation that must be addressed immediately to stop additional fees and penalties from piling up on already unmanageable sums. A 5-year plan under Chapter 13 may not be feasible in such circumstances. Therefore, the flexibility offered in Chapter 11 may be the best option.
Cram Down All Vehicles
In Chapter 13, a debtor can cram down the loan balance on car and truck loans to the value of the vehicle. For example, a 2011 Dodge Avenger with 100,000 miles in good condition might have a private party value of $5,000 but is encumbered with a loan for $7,000. In bankruptcy, the loan amount can be crammed down to $5,000 to match the value of the car. This option can save substantial amounts of money. It can also provide a way to own a car or truck outright following a bankruptcy discharge.
But this option only applies to vehicles purchased more than 910 days (approximately 2.5 years) prior to the filing of the case. So if the car was purchased last year, this benefit would not be available. But this time restriction found in Chapter 13 does not apply in Chapter 11. So the cram down benefit could be used if a debtor chooses to file under the latter code provision.
The Flexibility Could Be Worth the Added Cost
Make no mistake that achieving the benefits of filing under Chapter 11 comes at a cost and added complexity. For example, filing costs and lawyer fees will often be more than double that of a typical Chapter 13 case. Creditors are afforded the opportunity to vote on a debtor’s proposed plan, which is unique to Chapter 11. There is a lot more paperwork your lawyer will have to file and many hearings your lawyer will have to attend.
But the flexibility afforded a Chapter 11 debtor can definitely be worth the added cost. You as a debtor have the right to fashion a plan that substantially reduces your obligations to certain classes of debt. All it takes is for one class of impaired claimants to approve the plan. And, as long as certain minimum requirements are met, the bankruptcy court can put its stamp of approval on it.
Speak to a Chapter 11 Bankruptcy Attorney Today
If you are considering filing for bankruptcy, contact Benson Law Firm today. We can answer your questions and advise you as to which chapter best suits your needs and individual circumstances.