For most individuals, the choices in filing bankruptcy are two: Chapter 7 or Chapter 13. We’ve talked about the differences before. Is it possible that a debtor can’t qualify for either?
The answer is, unfortunately, yes. Chapter 7 is only available to people who either have more non-consumer than consumer 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 have to file Chapter 13. But Chapter 13 has its own limitations, among them being a limitation on the amount of debt that a person owes. Currently that debt limit is not more than $394,725 unsecured and $1,184,200 secured. 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 have to be made, and in how creditors can be treated.
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.
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.