New Jersey Individual Chapter 11 Bankruptcy – A Detailed Guide
Chapter 11 bankruptcy is often associated with businesses, as a way to continue operations while getting out from under a mountain of debt. But Chapter 11 bankruptcy is also available to individuals in New Jersey, and can provide the means to deal with crushing debt when Chapter 13 is unattainable and Chapter 7 too drastic. This article covers the details of Chapter 11 individual bankruptcy filing, including:
- The reorganization plan at the heart of any Chapter 11 individual bankruptcy case.
- The advantages and disadvantages of filing an individual Chapter 11 bankruptcy in New Jersey.
- How the treatment of debt and repayments differ in Chapter 11 compared to other bankruptcy chapters like 13 or 7.
How Does The Creation And Confirmation Of A Reorganization Plan Work In An Individual Chapter 11 Bankruptcy Case In New Jersey?
At the heart of any Chapter 11 bankruptcy filing is the reorganization and repayment plan which the debtor must file and have approved by their creditors. There are two types of filings available, one normal Chapter 11 filing, and the other a Subchapter 5 filing for small business owners.
Since the second option is relatively recent, we will first consider the standard Chapter 11 bankruptcy filing reorganization plan and the different types of debts and creditors which must be addressed within it.
The purpose of the reorganization plan that a debtor proposes is to provide appropriate treatment to both creditors of secured debts (with attached assets like a house or car) and unsecured debts (such as credit card or medical debt) who have claims in the case.
The secured parties will fall into a different category because they must retain their lien. The plan must normally entitle them to receive either the contractual payments owed to them or “adequate protection payments”. The latter are payments made so that the secured party’s position does not deteriorate during the case.
With respect to individual and unsecured creditors in a reorganization plan, they might fall into two categories. Priority claims would be something like a domestic support obligation for support or alimony. Those all must be paid in full within the plan during the time period, which would normally be a several-year time period. In addition, there may be priority tax claims which also must receive full payment.
General unsecured creditors, on the other hand, must only receive at least as much as they would get in a theoretical liquidation of the individual’s assets, paid according to the priorities under the bankruptcy code. That is known as the best interest of creditors test.
Finally, the plan must comply with the required disclosures under 1125 of the bankruptcy code and the confirmation requirements under 11 USC 1129. If it does not, it could be subject to objection not only by secured and unsecured creditors but also by the United States trustee assigned to administer and oversee the entire bankruptcy process.
How Does Chapter 11 Individual Bankruptcy Differ When Filing Under Subchapter 5 For Small Businesses?
Cases filed under the new (2020) Subchapter 5 bankruptcy provisions have different timelines and different eligibility requirements from standard Chapter 11 cases.
To qualify, a debtor must have 50% of their debt be related to business activities and must also have an entity that is involved in commercial business activities. In other words, they must be a small business owner in deep debt. Those individuals are eligible under the Small Business Reorganization Act, Subchapter 5, to seek bankruptcy up to a $7.75 million debt eligibility limit, with no distinction between secured and unsecured debt.
The Subchapter 5 cases have a Subchapter 5 trustee assigned to them. This trustee will work together with the debtor and the creditor constituencies to work on the resolution of any plan issues with the various creditor bodies in the case. The trustee is not a stakeholder in the case but assists with the process and has to have their administrative claims paid.
One of the main differences with the Subchapter 5 bankruptcy cases is that the debtor is under an affirmative obligation to file a plan within 90 days of the case filing. In addition, there can be a status conference within 60 days of filing, in which the debtor has to file a status report which will indicate what progress is being made towards filing a plan.
Additionally, under Subchapter 5 of the bankruptcy code, creditors are somewhat disadvantaged because the debtors may not have to require a five-year plan if they do not object. In addition, they cannot benefit from the absolute priority rule. This rule states that in Chapter 11 bankruptcy if a senior class of creditors rejects the plan and are not paid in full, junior creditors and equity holders cannot receive or retain property under the plan.
This becomes significant in any Chapter 11 plan where creditors don’t receive 100%, which is very common. In a Subchapter 5 case, the creditors can be crammed down and the individual can retain their interest in entities because the absolute priority rule does not apply in a Subchapter 5 bankruptcy.
Overall, this leads to an overall more streamlined and speedy process than an ordinary Chapter 11 bankruptcy filing, but one which is not available to everyone, and might require more time and effort in the short run to achieve.
What Are The Advantages And Disadvantages Of An Individual Chapter 11 Bankruptcy Filing In New Jersey?
Even for individuals who would otherwise qualify for Chapter 13 bankruptcy (under $2.75 million debt), an individual Chapter 11 bankruptcy filing can offer some advantages. For example, when you need more time to try to stretch out payments under non-dischargeable tax stats such as domestic support obligations.
One of the drawbacks of filing for debt relief with an individual Chapter 11 bankruptcy, on the other hand, is that creditors vote on the plan and that vote must be achieved to obtain a consensual plan. Indeed, in a Chapter 11 case, at least two-thirds of the dollar amount of the claims and one-half of the total number of creditors must support the proposed Chapter 11 plan for it to proceed. In a Chapter 13 case, on the other hand, there are no voting creditors, so that can make a big difference.
Furthermore, in any individual Chapter 11 bankruptcy case, there could be a creditor’s committee appointed to represent the creditor’s interests. The creditor’s committee’s counsel or the professionals they obtained, such as an accountant or others, also have to be paid as administrative claims in the Chapter 11 bankruptcy. As a result, Chapter 11 could be considerably more expensive than a Chapter 13 filing.
How Does The Treatment Of Debt And Repayment Differ In An Individual Chapter 11 Bankruptcy Compared To Other Chapters?
When comparing bankruptcy Chapters for individuals, Only Chapters 7, 13, and more rarely, 11 are used with any frequency. While 11 and 13 have many similarities, Chapter 7 bankruptcy is substantially different from both, especially when it comes to which debts are resolved and how.
First of all, in a Chapter 7 case, there is no repayment plan. Instead, an individual Chapter 7 trustee is appointed and they liquidate any non-exempt assets to pay the creditors what they can before discharging the rest. In addition, in a Chapter 7 case, a debtor’s post-petition income is not considered the property of the bankruptcy estate under 11USC541.
In Chapter 13, on the other hand, the repayment plan has a separate set of confirmation requirements and is reviewed by a Chapter 13 trustee. This trustee must be paid and will often provide input and object to the plan in an attempt to achieve a plan that is compliant with the bankruptcy code.
In an individual Chapter 11 case, the plan itself can potentially be directly objected to by creditors and is a more cumbersome process because you have to achieve a majority vote for support from the creditors.
For more information on Reorganization Plan In 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.