Folsom Law Firm Describes Non-Business Chapter 11 Bankruptcy Filings
From and attorney's perspective, why do individual debtors file chapter 11 instead of chapter 13?
Where an individual or household's income exceeds the limits provided for in Chapter 7, I like to evaluate other options under the bankruptcy code. The first determination that I make is whether the individual debtor(s) are within the debt limits established to meet the eligibility requirements in a chapter 13 case. I look at two categories relevant to this inquiry, secured debt and unsecured debt. Secured debts are normally linked to some kind of property, such as house or a car. In the Folsom and Sacramento California areas it is quite common for home owners to have mortgages that exceed these limits especially where they own more than one home. While the most common unsecured debts are credit cards. If the debt in either one of these categories exceeds the statutory limits, Chapter 13 is probably not a viable option.
Secondly, even if the debtor's debt is below the relevant limits, in a chapter 11 small business sole proprietor's case or an individual case, calculating a debtor's disposable income by incorporating the debtor's actual income deductions, taxes, and expenses is currently possible. This lessons the possibility that a debtor's financial commitment is based on an artificial disposable income figure that might translate into an unrealistic obligation.
Another important consideration is the commitment period commensurate with the debtor's reorganization plan. In chapter 13, a plan usually must be between three and five years. In a chapter 11 there is greater flexibility. This can translate into payment terms that are more reasonable and appropriate for a debtor's particular situation. For example, if a debtor owes $50,000 on the debtor's car, a Lexis Hybrid SUV, and the value of the car is $30,000, and purchased several years ago, and otherwise eligible for a reduction in the secured debt associated with the car, the debtor might want to take the opportunity to do so. If so, the debtor would probably need to pay the debt during the life of the plan. In a chapter 13, this might result in monthly payments that the debtor cannot afford. However, with longer plan terms available in a chapter 11, the debtor could reduce the amount of those payments in such a plan. A longer repayment period can also be effective in preventing foreclosure or modifying a mortgage.
While these are just a few considerations, as a bankruptcy attorney I find them to be frequently relevant. This article is not attorney legal advice.
