Chapter 11 for Individuals vs. Chapter 13

Lexis-Nexis book co-authored by Brett Weiss, the writer of this blog

Most people think that individuals cannot file for bankruptcy relief under Chapter 11–it’s only meant for big businesses.

They’re wrong.

Chapter 11 lets people who don’t qualify for Chapter 13 or need some of the special protections that Chapter 11 provides reorganize their debt. They can catch up on mortgage arrearages, restructure debt on investment property, and in most cases, pay pennies on the dollar toward credit card and medical debt. But Chapter 11 is very different from Chapter 13. This blog will highlight some of the major differences.

• Eligibility. A chapter 13 debtor must be an individual who owes on the date of filing less than $383,175 in unsecured debt and less than $1,149,525 in secured debts. A chapter 13 debtor must have “regular income,” which is defined in the Bankruptcy Code to mean, “[I]ncome… sufficiently stable and regular to enable such individual to make payments under a plan…”In a chapter 11 case, there is no cap of any sort on the amount of debt a chapter 11 debtor may have (and, like all other chapters, no minimum amount of debt to be eligible to file). There is no regular income requirement. In fact, there is no income requirement whatsoever. Many chapter 11 cases are filed for individuals who have no income, but have assets that will be sold and used to fund a chapter 11 plan.
• Administrative Requirements and Fees. A chapter 13 debtor can continue to use his or her existing bank accounts, and only debtors operating an ongoing business typically file monthly operating reports. Chapter 13 debtors pay trustee fees directly to the chapter 13 trustee. These fees vary from jurisdiction to jurisdiction (and even from chapter 13 trustee to chapter 13 trustee), and can amount to up to 10% of the payments to creditors. The filing fee for a chapter 13 is $286.In most chapter 11 cases, the debtor must close all pre-petition bank accounts and open new Debtor-in-Possession (DIP) bank accounts. All funds passing through the debtor’s hands must flow through the DIP accounts. Even individual debtors not in business must file monthly operating reports detailing their income and expenditures. Fees are payable quarterly to the U.S. trustee, are the same nationally, and are based on monthly expenditures. The typical individual quarterly fee is $650, although it can be higher or lower depending on the details of the case. The chapter 11 filing fee is $1,213.
• Codebtor Stay. While the force of the automatic stay is the same in both chapters, chapter 13 imposes an automatic stay for codebtors on consumer debt, while chapter 11 does not.
• Trustee Oversight. Chapter 13 cases are typically overseen by a chapter 13 trustee, who reviews filings, computes payment requirements, and represents the interests of the general unsecured creditors. The chapter 13 trustee conducts the Meeting of Creditors. The chapter 13 trustee often serves as a “gatekeeper,” ensuring compliance with the Code and making recommendations to the court (which are often approved without a hearing). Chapter 13 debtors are not held to the standards of a fiduciary.In a chapter 11, there typically is no chapter 11 trustee, except in cases of fraud or mismanagement. Certain aspects of the case are reviewed by the U.S. Trustee, but its role is completely different from that of a chapter 13 trustee. Unlike a chapter 13 trustee, the U.S. trustee primarily reviews, and the debtor typically will not receive the same sort of guidance that many chapter 13 trustees provide in plan formulation and terms, analysis of required payments, etc. A U.S. trustee paralegal or accountant typically conducts the Initial Debtor Interview, at which the basic administrative requirements of a chapter 11 case are reviewed with the debtor. A U.S. trustee trial attorney normally conducts the Meeting of Creditors. Chapter 11 debtors are held to the standards of a fiduciary, operating the bankruptcy estate for the benefit of the creditors of the estate.
• Means Test and Budgets. In a chapter 13 case, the 7+ page Means Test form must be completed to determine whether a debtor is above or below the state median income, and therefore to determine the length of the chapter 13 plan, as well as the amount of the chapter 13 plan payment. In an above-median income case, the means test is usually the determinative factor in how much creditors receive through the plan. A lengthy calculation, including a detailed analysis of the IRS standards and actual debtor expenses must be performed and then scrutinized by the chapter 13 trustee. Chapter 13 trustees tend to be very strict when it comes to budgeting for “nonessentials,” such as contingency funds, payment of private school or college tuition and student loans, “luxury” car payments, etc.The chapter 11 means test is computed on a simple two-page form, requiring only a determination of current monthly income.  Although creditors have the right to challenge expenses as unreasonable, they seem to be allowed much more frequently in chapter 11 cases, particularly tuition expenses and student loan repayment.
• Plans and Plan Payments. A chapter 13 plan must be filed within 14 days of filing the petition. Payments typically start 30 days after the Plan is filed. Only the debtor may file a chapter 13 plan. Most jurisdictions have a form chapter 13 plan. The Court approves the chapter 13 plan, usually after recommendation by the chapter 13 trustee. Creditors do not vote on approval of the plan, but may object. A chapter 13 plan cannot exceed 60 months. Mortgage arrearages, mortgages that are restructured through the bankruptcy, taxes and domestic support obligations can be spread out, but must be paid in full within 5 years.Except in small business cases, there is no mandatory deadline for filing a chapter 11 plan, and payments do not begin until after the plan is confirmed, or approved, by the Court (which often takes 6 months to a year or longer). While creditors have the right to file a chapter 11 plan for the debtor, due to the cost, this is very rare in individual cases. Most jurisdictions do not have form chapter 11 plans. In addition to the chapter 11 plan, the debtor must also file and the court must approve a disclosure statement containing information about the plan that would allow creditors to properly evaluate it. Creditors vote on approval of the plan, and may object, although there are provisions for approval of the plan over creditor objections. There is no limit to the length of a chapter 11 plan. This means that mortgage arrearages or a restructured mortgage on investment property can be spread out over 20-30 years. Taxes can be spread out, but must be paid in full within five years from the date the case is filed. Domestic Support Obligations must be paid in full on the Effective Date of the Plan, shortly after it is confirmed.

This blog only talks about the most basic of differences. There are far more. Chapter 11 is a very complex area of law. If you are considering filing a chapter 11, it is absolutely essential that you speak with an experienced attorney familiar with the special provisions of an individual chapter 11 case.