Under the United States Bankruptcy Code, or the Code, individuals who are in debt can attain debt relief through Chapter 7, 11, or 13. Most commonly, individuals will file for either a Chapter 7 or Chapter 13, while businesses commonly file Chapter 11. Nonetheless, under certain circumstances, individuals will utilize the Code through a Chapter 11 bankruptcy.

Key Differences Between the Chapters

Individual or personal bankruptcy, known under the Code parlance as consumer bankruptcy, can be sought in different ways. The Code Chapters, 7, 11, and 13, all provide for the coveted bankruptcy discharge when the individual finishes the course of the bankruptcy. However, the three chapters have uniquely different features:

• Chapter 7: Chapter 7 bankruptcy is known as “straight bankruptcy” because it acts as a sort of “liquidation.” That is to say, when an individual files for Chapter 7 bankruptcy protection, the debtor will place his or her possessions in the bankruptcy estate that will be used to pay off creditors. The bankruptcy estate will have certain exceptions, e.g. items of personalty like a family portrait, that will not be part of the estate. Once those items are identified and determined, they will be sold. The Chapter 7 bankruptcy trustee will then take the proceeds of the sale and distribute them to the creditors. The Code determines what items must be sold and the order of distribution for the creditors. Debtors often emerge from bankruptcy in four to six months.
• Chapter 11: Chapter 11, unlike Chapters 7 and 13, is all about negotiation. Upon filing, the debtor will propose a plan to the creditors. The creditors will often counter with their own plan. There will be a back and forth until the debtor and most of the creditors agree on a plan. Thereafter, the debtor submits the plan to a judge for approval. Once approved, the debtor will have to complete the course of the plan, which is whatever the parties agreed to during negotiations. Upon completion of the negotiated plan, the debtor will emerge from bankruptcy with a discharge.
• Chapter 13: Chapter 13 bankruptcy is known as the “wage earner’s bankruptcy” because only those earning a wage are eligible. Under Chapter 13, a debtor prepares a budget and submits that budget to a judge. The budget is based on the debtor’s income and determines what portion of the income should be distributed to the creditors. Once submitted and approved, the debtor pays the trustee per his or her budget requirement. The trustee then distributes those proceeds to the creditors. Often, a debtor need not sell assets. Once the course of the bankruptcy is complete, which is three of five years, the debtor will emerge from bankruptcy.

Individuals who File for Chapter 11 Bankruptcy

Individuals who file for Chapter 11 bankruptcy are often those who failed or were unqualified for Chapter 7 or 13. Chapters 7 and 13 do not require much creditor participation to create a bankruptcy plan and therefore have little or no negotiation whereas Chapter 11 requires significant creditor participation. This makes Chapter 11 more difficult, expensive, and time consuming.

The expenses for filing a Chapter 11 petition are as follows:

• Attorney’s fees These fees tend to be significantly higher than the other chapters because a bankruptcy attorney would need to spend more time negotiating;
• Filing fees The fee for filing a Chapter 11 statement is $1, 717;
• U.S. Trustee fee The debtor pays each Trustee assigned to the case $250 per quarter;
• Mailing costs The debtor will need to constantly provide the creditors with updates, disclosure statements, and ballots.

Risk

Under the Code, three creditors can place a debtor into involuntary bankruptcy provided that the debtor is not generally paying debts as they become due. Or, if circumstances dictate, i.e. concerns that a debtor will not last through a protracted Chapter 11 banktuptcy, a judge can side with a creditor and convert the case into a Chapter 7 liquidation. This can be a powerful tool for a creditor adverserely negotiating a Chapter 11 plan. If the debtor becomes too aggressive in his or her proposed plan, the creditors might try converting the case into a Chapter 7 liquidation plan. If negotiations drag for a significant amount of time and creditor no longer wants to negotiate, the creditor may move to convert into a Chapter 7. This weakens debtor negotiating power from the onset.

In reality, individual debtors seeking a fresh start though the bankruptcy code will file either for Chapter 7 or 13 protection, depending on the circumstances. In rare instances, Chapter 11 bankruptcy is the best plan for a debtor.

In debt? Bankruptcy may be the right option for you. Contact the law firm of Melanie Tavare, a Bay-area debt relief attorney.