Chapter 11 Bankruptcy For Individuals: Why It Makes Sense
Chapter 11 is often thought of as a business bankruptcy, but individuals can file for Chapter 11 also. But why would an individual use a Chapter 11 bankruptcy? What benefits does a Chapter 11 have for an individual?
No Means test, No IRS Guidelines
The first benefit is that there is no means test. For debtors who may make too much money for a Chapter 7 bankruptcy, in Chapter 11, it doesn’t matter how much money that you make. You can still file for Chapter 11 bankruptcy.
In addition, the debtor doesn’t have to be in line with what the IRS says are allowable expenses for living expenses. The end result is that the debtor can get a repayment plan that is more in line with what he or she can actually afford, and there is a more realistic projection of the income the debtor can spend on a repayment plan.
Chapter 11 also provides the unique benefit of being able to modify some secured loans, such as car or home loans. This is not available in any other type of bankruptcy.
Additionally, in some Chapter 13 cases, a car loan can be reduced to the value of the vehicle, if the vehicle is upside down. But the vehicle must be financed for 2 and a half years. That time restriction doesn’t apply in Chapter 11, where it is possible to lower your loan to the value of the vehicle after any time period.
Payment Plans & Control
With Chapter 13, you are confined to either a three or five year repayment plan. The length depends on your debt and income. But in Chapter 11, there can be a repayment plan in any number of years. There is no set time frame for repayment.
Just like a business is able to keep running its own business, so too does an individual who files for Chapter 11. Unlike it other cases, where a trustee is very active, and acts almost as an adversary to the debtor, in Chapter 11, the trustee takes a relatively passive role. You will have some oversight, and may need to apply to the court to take certain actions, but generally, you are not handing your property over to the trustee or the court; you continue to manage your own financial affairs.
In Chapter 13 there is a debt limit. If you exceed the limit, you can’t file for Chapter 13. But if your income is too high you also can’t file for Chapter 7. So for debtors with higher income and high debt, Chapter 11 may be the only option. Chapter 11 allows you to work with higher amounts of debt, unlike any other form of bankruptcy.