In yesterday’s post, we talked about having to qualify for Chapter 7 or 13. For most individuals, the choices in filing bankruptcy are these two: 7 or 13. I mentioned that it’s possible a debtor couldn’t qualify for either. In summary, this is how that can happen.
Neither Chapter 7 nor Chapter 13 is an option.
Chapter 7 is only available to people who either have more non-consumer (business) than consumer (household) debt or whose current monthly income, as calculated by the Means Test, puts them below the median income for a family of their size in their county. If they don’t fall into one of those categories, then they are presumed to be abusing the bankruptcy system by filing Chapter 7 and must file Chapter 13. But Chapter 13 has its own limitations, among them being a limitation on the amount of debt, both secured and unsecured, that a person owes. If a debtor’s obligations exceed either of these amounts, she cannot file Chapter 13. And if her income exceeds the median and she has primarily consumer debts she can’t file Chapter 7, either.
Is there any relief available under the Bankruptcy Code?
Yes, but it’s a bitter pill and it comes in the form of Chapter 11. Chapter 11 is primarily used for business reorganizations. Chrysler, United Airlines, and other major corporations have used Chapter 11. It’s available to individuals as well, but it’s expensive and time consuming. The plan confirmation process is more complex and takes longer than in Chapter 13. However, it’s much more flexible than Chapter 13 in terms of how much and for how long payments can be made, and in how creditors can be treated. Additionally, since February 2020, a streamlined version of Chapter 11, known as Subchapter V, or the Small Business Reorganization Act, is available.
Chapter 11 in place of Chapter 13.
Chapter 11 could be used to give a debtor more time to repay her debts, either in part or in full, than she would have in Chapter 13. A Chapter 13 plan is limited to 60 months. A Chapter 11 plan has no time limitation. In Chapter 11 a debtor also has more flexibility in how and when the payments must be made that exists under Chapter 13. For a debtor who does not qualify for Chapter 13 and doesn’t want to or can’t file Chapter 7, Chapter 11 is an option.
Chapter 11 as Chapter 7
It’s also possible that Chapter 11 could be used as a de facto form of Chapter 7, where non-exempt assets are liquidated, and a distribution made to creditors. Since many Chapter 7 cases are closed as “no asset” cases, meaning the debtor has no assets from which the Chapter 7 trustee can make a distribution, if a debtor doesn’t qualify for Chapter 7 because of the income limit, and doesn’t qualify for Chapter 13 because of the debt limit, but otherwise has no assets from which a Chapter 7 trustee could make payments, in a Chapter 11 the debtor could propose that all non-exempt assets (of which there are none) be liquidated and a distribution made, then the debtor receives her discharge. Essentially the debtor uses Chapter 11 as Chapter 7. Warning: If the debtor’s budget from Schedules I and J shows the existence of excess income (disposable income, in bankruptcy language), the trustee might object to this type of a plan, saying the debtor should be required to make some sort of payments under Chapter 11 as if she were in Chapter 13.
While it would be rare, if neither Chapter 7 nor Chapter 13 is available to a debtor, she should consider Chapter 11. Before doing so, she should consult with an attorney experienced in bankruptcy law in general and Chapter 11 specifically. If you have bankruptcy questions, please contact us here or call or text (801) 413-3708, or email email@example.com.