Is It True Individuals Can File A Chapter 11 Bankruptcy? I Thought This Was Just For Businesses?

Individuals are permitted to file for chapter 11 bankruptcy. However, in most circumstances, depending upon the amount of secured and unsecured debt owed by that individual and cost considerations, individuals with lower amounts of debt are better candidates for chapter 13 or chapter 7 cases.

What Are The Eligibility Requirements For An Individual To Be Able To File A Chapter 11 Bankruptcy?

In order to be eligible to file for chapter 11, an individual debtor must complete a credit counseling course prior to filing. There is no restriction in terms of the value of assets or total amount of debt. However, Chapter 11 is a remedy that is mainly utilized by businesses and higher income earners or individuals with substantial personal guarantee claims against them and secured debt. An individual or business utilizing a balance sheet test does not have to be technically insolvent to seek relief.

When Would An Individual Choose A Chapter 11 Bankruptcy Over A Chapter 13 Bankruptcy?

Individuals choose to file a chapter 11 case as an alternative to filing under chapter 13 when their debt exceeds the statutory jurisdictional limit determining eligibility to file a chapter 13 case under 11 USC § 109€ of the Bankruptcy Code. Individuals filing Chapter 13 may not have noncontingent, liquidated unsecured debts in excess of $419,275,000, or noncontingent, unliquidated secured debts in excess of $1.257 million. The debt limitation is the primary and often the sole reason why an individual who would normally be eligible to file for chapter 13 seek to reorganize their financial affairs in a chapter 11 case.

Chapter 11 is an extraordinarily complex and expensive process. The filing fee alone for a chapter 11 case is $1,717. Debtors must also file monthly operating reports with precise detail of their income and expenses. In addition, debtors must submit to the jurisdiction of the court all of their disposable income over a five-year period, which is similar to a chapter 13 case. However, in a chapter 13 case, there is no voting on the Chapter 13 plan. In a chapter 11 case, there is required voting on a proposed plan by creditors. To achieve confirmation, Debtors must receive the affirmative vote of creditors holding two-thirds in dollar amount and one-half in number in each class in favor of the plan, and they all must also have the affirmative vote of one accepting impaired class.

The reason chapter 11 is not the preferred choice for individual debtors are the strict requirements for confirming a plan under 11 USC § 1129 of the Bankruptcy Code, which apply equally to both individual debtors and business debtors. In chapter 13, since there is no creditor voting, it is usually a more simplified confirmation process.

To summarize, the circumstances in which individuals file chapter 11 fall into three general categories. One example is when debtors are facing imminent enforcement of a large judgment that may be challenged as to liability or amount on appeal, chapter 11 might be a reasonable substitute to posting an expensive appeal bond by invoking the automatic stay by virtue of the filing. Second, debtors may need time to resolve non-dischargeable debt, such as IRS tax debt, state tax debt, domestic support obligation debt, or otherwise non-dischargeable fines or penalties. Third, if the debtors would face economic, personal, or tax consequences as a result of the involuntary liquidation of property they have in order to satisfy certain debt, filing a chapter 11 may be feasible.

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