Chapter 11 Bankruptcy for Individuals: Better Than Chapter 13?
You may be aware that more and more businesses are starting to file for Chapter 11 bankruptcy. But you may not be aware that even individuals in some cases can also file for Chapter 11 bankruptcy. But what advantages or disadvantages are there for an individual to file for Chapter 11, as opposed to Chapter 13 bankruptcy?
How Much Debt?
For one thing, in Chapter 13, there is a limit to how much debt you can have. Most of us will not hit these ceilings, but it is possible. An individual can only have $38,317 in unsecured debts (such as credit cards or medical debt), and $1,149,525 in secured debts (debts that are secured with a mortgage, or where property is pledged as collateral or security for the loan).
But these limits don’t apply in Chapter 11. That means that for individuals who have very large amounts of debt, Chapter 11 may be the only avenue they have to discharge debt.
Chapter 13 bankruptcy also requires that you have enough income to make payments under a repayment plan. But Chapter 11 has no such requirement. It is possible to have no income, so long as you have property or assets that you are willing to sell to pay back some of your debt. That option isn’t available in Chapter 13 bankruptcy.
Management of Finances
In Chapter 11 bankruptcy, the debtor generally gets to manage their own affairs in the absence of any kind of fraud that would require stricter oversight. The debtor is assumed to be acting for the benefit of the creditors, and can manage their business or financial affairs in whatever way is best for those creditors.
But in Chapter 13 bankruptcy, there is a trustee that manages the estate, and the case. The trustee will review the consumer’s financial documents, payment schedules, accept the regular payments, and distribute them to the appropriate creditors. If there is a problem with the case, the trustee will file objections, and can potentially object to the discharge itself.
In Chapter 13, the debtor’s regular budget is highly scrutinized. First, the trustee will determine if the debtor’s income is more or less than the state median income. Your income will determine how much your creditors will receive when making your payments. The trustee may not allow for budgeting of things that aren’t seen as essential.
In Chapter 11, although creditors can claim that expenses are unreasonable, they rarely do so. Things like student loan payments, college payments for kids, or putting money away for savings are often considered acceptable.