Individuals Can File Chapter 11 Too
Chapter 11 is not just for small businesses and large corporations suffering insurmountable debt problems. Pursuant to Section 109(d) of the bankruptcy code, a person that may be a debtor under Chapter 7 (which is any individual) may also take advantage of the generous provisions in Chapter 11 to overcome their debt problems. Many high-income debtors will file a Chapter 11 if they fall outside the debt limits for Chapter 13. The current Chapter 13 debt limits are $1,081,400 for secured debt, and $360,475 for unsecured debt. If you owe more than this in either category, you will have to file Chapter 11 to propose a payment plan to repay your creditors over time. While many individuals with primarily business debts will be able to file a Chapter 7, regardless of income, Atlanta, Georgia Judge Wendy Hagenau recently ruled that an individual with primarily business debts who files a Chapter 7 and has a very high level of disposable income may be forced into a Chapter 11. Regardless of which Chapter you file, it is imperative that you consult with an experienced bankruptcy attorney prior to filing.
The Benefits of Filing an Individual Chapter 11
Historically, individuals filed Chapter 11 bankruptcy when they exceeded the debt limits of Chapter 13. For instance, many celebrities and professional athletes are required to file a Chapter 11 rather than a Chapter 13 because they have far too much secured and unsecured debt. However, there are also a number of benefits in filing a Chapter 11 for people who would otherwise qualify for a Chapter 13.
1. Pre-petition Mortgage Arrears Are Too High: If a you want to keep your primary residence in bankruptcy and are behind on your mortgage payments, you cannot file a Chapter 7 to prevent the loss of your home. Chapter 13 is the typical solution; however, one of the limitations of Chapter 13 is that all your mortgage arrears must be paid within a 5 year period in equal monthly payments. If your haven’t made a mortgage payment in over a year, it can be very difficult to maintain your regular monthly payment in addition to an amount each month that will pay off your arrears in five years. With a Chapter 11 bankruptcy, you are not bound by this 5 year limit and can stretch out the cure period for a significantly longer time period.
2. Cram-Down of Your Recently Financed Car: In bankruptcy, a creditor’s lien can be reduced to the fair market value of the property securing it. So, if you owe $100,000 on a rental property that is worth only $50,000, your balance will be reduced to $50,000. However, there are certain limitations on the debtor’s ability to do this, and one such limitation is governed by the “hanging paragraph” in Chapter 13. The “hanging paragraph” represents a paragraph in Chapter 13 of the bankruptcy code that provides that any car loan obtained within 910 days of your bankruptcy case cannot be crammed down to the value of the vehicle. This limitation does not exist in Chapter 11. So if Dan the Contractor finances a $45,000 truck in 2010, owes $35,000 by 2012, and files a Chapter 13 that same year, he will have to pay the entire $35,000 balance over the life of the plan. If he files a Chapter 11 and can prove that the truck is only worth $20,000, he will only have to pay back $20,000 through the Chapter 11 Plan. This results in a savings of over $15,000 over five years – a significant amount of money for Dan.
3. Recent Discharge in Chapter 7 or Chapter 13 Case: If you have received a discharge in a Chapter 7 case within 4 years of the petition date or a discharge in Chapter 13 within 2 years of the petition date, you cannot receive another discharge in Chapter 13. But even if you just received a discharge under either Chapter, you can still file a Chapter 11 bankruptcy and receive a discharge once you complete all payments under the Plan.
4. Nondischargeable Debts (Payroll Taxes, Domestic Support, Etc): Chapter 11 can give an individual the time needed to properly reorganize their affairs for liabilities considered nondischargeable under the bankruptcy code. Nondischargeable means the debt will not be wiped out in bankruptcy. Among the debts that will survive bankruptcy are payroll taxes. Payroll taxes are serious business, and if your business fails to pay these taxes, you can be held personally liable. Fortunately, filing Chapter 11 will stop any penalties and fees from accruing on these unpaid taxes, and your attorney can work with the IRS to structure a repayment plan or settlement offer that you can afford.
If you want to talk more about the benefits of filing an individual Chapter 11 bankruptcy, call Atlanta bankruptcy attorney Will Geer at 678-587-8740.