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New Jersey Individual Chapter 11 Bankruptcy Filing - Limits And RestrictionsFiling for Chapter 11 bankruptcy as an individual is one of many ways of taking control of crushing debt and moving toward a new life and a fresh start. But not all forms of bankruptcy are created equal, and while Chapter 11 offers some advantages over the most common ones (Chapter 7 and Chapter 13), it has its limits and restrictions as well.

This article explains some of the finer points and comparisons between Chapter 11 individual filing and other bankruptcy options including:

  • The lack of exemptions and other freedoms when filing for Chapter 11 Bankruptcy as an individual in New Jersey.
  • Chapter 11 bankruptcy creditor challenges and oppositions.
  • Converting your Chapter 11 bankruptcy to Chapter 7 or 13, and other bankruptcy alternatives.

Are There Any Specific Exemptions Available To Individuals Filing For Chapter 11 Bankruptcy?

Unlike other bankruptcy chapters, such as Chapter 13, Chapter 11 has no limit on the amount of debt an individual can have when filing for bankruptcy. As such it can sometimes be an attractive and effective means of reorganizing, repaying, and overcoming crushing debt. On the other hand, it offers no additional protections either.

Exemptions on which debts or assets cannot be included under the bankruptcy code are set forth in 11USC522, and there are no additional exemptions available to individuals who file for Chapter 11 bankruptcy in New Jersey.

What Is The Role Of The Bankruptcy Court And The Appointed Trustee In An Individual Chapter 11 Bankruptcy Case In New Jersey?

Once an individual has filed a Chapter 11 bankruptcy case, they are known as what’s called a debtor in possession. This means that, unlike in Chapter 7 bankruptcy, for example, they remain in possession of their assets and they are operating their business affairs as a fiduciary for all creditors.

Indeed, both the debtor and creditor must comply with the requirements of the United States Trustee’s Office when filing the initial debtor report. In addition, they must comply with subsequent monthly operating reports in any individual Chapter 11 case.

Unlike Chapter 13 or Chapter 7 bankruptcy filings, there is no appointed trustee when a Chapter 11 case begins. However, if a debtor is not filing reports or is failing to follow the mandates of the bankruptcy code, a Chapter 11 trustee could be appointed to manage the individual affairs. One might also be appointed in situations where there is an accusation of fraud, mismanagement, or diversion of assets.

In Chapter 11, there is also the option to file as a small business owner under Subchapter 5. In such cases, a Subchapter 5 trustee is appointed as an administrator who will work collaboratively with the debtor, creditors, and the United States Trustee’s Office. They will provide input, suggestions, and potential resolutions for issues that arise when trying to achieve the bankruptcy plan.

Under What Circumstances Can Creditors Challenge Or Oppose An Individual’s Chapter 11 Bankruptcy Plan In New Jersey?

Circumstances in which creditors can challenge an individual’s Chapter 11 plan are varied and may depend on the type of creditor.

Creditors holding secured debts have different rights, for example. This means they are entitled to contractual post-petition payments or adequate protection payments to ensure their interest is not diminishing in value during the case.

If they do not receive these, they can move for relief from the automatic stay or challenge the bankruptcy plan itself as providing improper treatment. They can challenge it as long as they are not receiving their deferred payments based upon their allowed secured claim in the plan.

Similarly, taxing authorities and priority creditors who are not scheduled to receive full payment under the plan can use that as a basis for an objection.

Other possible objections can be made by any of the constituents, including the US trustee, if there is one, secured or unsecured creditors, or priority taxing other creditors if they believe the debtor’s plan itself is infeasible. This means they believe the debtor will not be able to comply with the plan itself in terms of financial payments to creditors over the life of the plan, or that the financial circumstances do not support the proposed payments under the plan.

Another common objection can come from unsecured creditors. They can argue that the payment to them isn’t as much as they would have received in a theoretical Chapter 7 case, which is known as the best interest of creditors test.

For example, imagine a debtor has considerable equity in a commercial property or residential property. When you apply the liquidation test, if the properties were theoretically sold and the distribution proceeds from those assets would be significantly more than what the creditors would receive under the proposed plan, creditors would have grounds for objecting under the best interest test.

How Long Is The Process Of An Individual Chapter 11 Bankruptcy Case?

Another aspect of Chapter 11 bankruptcy filing, which can be both an advantage and a drawback, is the flexible and open-ended timeframe. In fact, there is no set timeline for an individual Chapter 11 bankruptcy case in New Jersey. So while a Chapter 13 filing has to propose a repayment plan over only three to five years, Chapter 11 filings are not bound to such a tight deadline, though there are still some to respect.

On the other hand, a Subchapter 5 case will proceed faster (which is the purpose of the Small Business Reorganization Act of 2019 that enabled them) because of the streamlined filing deadlines. While the deadlines are less tight in a non-Subchapter 5 filing, they are still very important.

Typically, in the first year of standard Chapter 11 bankruptcy, if the debtor does not propose a plan and fails to take action to confirm it, they could be subject to a motion to dismiss the case. Alternatively, a motion could be issued to force them to convert it to a Chapter 7 bankruptcy because the debtor has not made the progress they had promised to when they filed it.

Can I Convert My Chapter 11 Bankruptcy To A Chapter 7 Or 13 Filing In New Jersey?

Chapter 11 individual bankruptcy cases can be converted to Chapter 7, which is more drastic, but not to Chapter 13.

In the Chapter 7 conversion, the debtor will no longer be allowed to operate or manage their own business affairs, and a Chapter 7 trustee will take over the process. They will liquidate all non-exempt assets, review whether the debtor’s exemptions are appropriate, and distribute the proceeds of any liquidations to the creditors.

Are There Any Alternatives To Chapter 11 Bankruptcy For Debt Relief In New Jersey?

The alternative to individual Chapter 11 bankruptcy relief would normally be for individuals that are within the debt limits of Chapter 13 to proceed through that route. Indeed, as a result of the increased debt limits and the lack of distinction between secured and unsecured debt in determining the $2.75 million debt limitation for Chapter 13 bankruptcy, Chapter 11 bankruptcies are already going to be far less common.

Despite the 10% administrative fee to the Chapter 13 trustee, Chapter 13 bankruptcy may be a more viable alternative due to the expense of the Chapter 11 bankruptcy. Indeed, the potential for creditor’s committee and other administrative costs can make a Chapter 11 case less economical.

The other possible alternative would be for the debtor to consider an assignment for the benefit of creditors. This is a state court liquidation that proceeds under New Jersey State Law rather than federal bankruptcy law.

This does come with some restrictions however compared to a Chapter 11 federal filing. Notably, there are a few limited instances in which during an assignment for the benefit of creditors with court approval that an assignee can continue to manage the debtor’s business for a specific period of time.

Normally, an assignment for the benefit of creditors, if it is filed by an entity or individual, will not allow the continued operation of the business until court approval is granted. Which would occur immediately in the case and usually for a limited purpose and limited duration.

Regardless of your circumstances, if you are facing considerable debt, you should always consult with an experienced New Jersey bankruptcy attorney. They will be able to help you identify which bankruptcy Chapter or other available debt relief solution would be the best for you.

For more information on Exemptions To Filing An Individual Chapter 11 Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (908) 373-8500 today.

Michael McLaughlin, Esq.

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