It’s pretty rare that an individual would file for Chapter 11 bankruptcy, so much so that in 1991 the U.S. Supreme Court had to reaffirm the individual right to Chapter 11 protection. Today, Chapter 11 may be the only bankruptcy option available for some, but it is a complex and expensive option with requirements that differ from other more common individual bankruptcy proceedings, and one that should not be taken lightly.
Individuals who can fit under the Chapter 13 limits, with less than a million dollars in secured debts and under $336,900 in unsecured debts, should do so. If the size of their debts don’t qualify for Chapter 13 protection, a debtor can take a shot at Chapter 7 liquidation, and could see most of their debts discharged if their adjusted income isn’t enough to pay 25% of the unsecured debt in 60 payments (5 years). But, if they don’t pass the means test, Chapter 11 is probably their only choice.
Right off the bat, debtors will see the cost of filing for bankruptcy is much higher than for other chapters – as much as four times higher. In addition to the filing fee of $899 or more, the court assesses a quarterly fee based on available funds until the reorganization plan is approved. This can range anywhere from $250 to $10,000 per quarter while attorneys haggle with the trustee and creditors to iron out the restructuring of the various debt. And this doesn’t include legal fees, which are also substantially higher for a Chapter 11 case, whether through the initial retainer or accrued hours. The cost of going broke isn’t cheap!
Before an individual can even file for bankruptcy, federal law requires them to attend a qualified credit counseling service, though in emergency filings the petitioner can promise to attend the counseling later. Inevitably, the credit counselor will ask for a list of all the debtors income, assets and liabilities and attempt to create a workable repayment plan. The counselor can’t give legal advice, but they will usually attempt to steer a debtor away from bankruptcy if possible. At the end of the credit counseling session, the debtor receives a certificate, which must be filed with the court.
The initial court filing is not unlike the credit counseling process: it’s mostly an information gathering process. Courts allow individuals to represent themselves in bankruptcy, but for a Chapter 11 it’s unlikely the debtor would have the time to devote to learning the entire process. Unlike in Chapter 7 where a debtor can have much of their debts absolved, Chapter 11 only provides for a reorganization of debt, sometimes through the sale of assets, but mostly by rearranging the terms of repayment. An attorney with bankruptcy experience will know how best to report an individual’s assets to claim the maximum number of exemptions. Each state has its own laws, but most have allowances for homesteads, pensions, personal effects, public benefits and so-called “tools of the trade” that prevent items being confiscated by the bankruptcy trustee.
Once the initial bankruptcy petition is filed with schedules of assets and debts, creditors will be given an opportunity to make claims against property, make motions in the court, and generally to negotiate for the best possible deal. At least one meeting between the trustee, creditors and the debtor or their representative is likely. The process of hammering out the repayment plan, determining what assets will be sold and how much each creditor is entitled to receive, is the longest part of a Chapter 11 proceeding. A good bankruptcy attorney will have secured debts crammed down if the replacement value of the security is less than the existing debt, as is often the case with a mortgage foreclosure. Ultimately, the trustee will bring the repayment plan before the judge, and if there are no objections, it will be confirmed by the court.
With their bankruptcy case discharged, an individual’s credit score will gradually start to improve. They may only be able to obtain secured loans with high interest rates, but the fact that they can’t file for bankruptcy again for another seven years gives lenders a bit of confidence. In addition to trying to rebuild their credit, though, it’s imperative that the individual stick to the terms of the repayment plan and satisfy it entirely. After all the scrutiny that goes into designing the plan, it’s unlikely that it will be overly burdensome unless the situation drastically changes. Failure to live up to the repayment plan can have severe consequences. On the other hand, the purpose of bankruptcy is to give individuals a chance at a fresh start. Taking the opportunity is not necessarily a bad thing if done carefully.