When consumers file bankruptcy they usually file under Chapter 7 or Chapter 13. Chapter 7 is the most popular, accounting for about 60% of all filings, with Chapter 13 occupying the second place position. But it occasionally happens that a person can’t file under either Chapter 7 or 13. This can happen when the person’s annualized income, as calculated by the Means Test, is greater than the median income for a family of her size in her particular county. In that case, she is generally ineligible for filing under Chapter 7. A person may not want to file under Chapter 7 because of equity in assets that would be lost. So in either of those situations, the first option is Chapter 13.
But Chapter 13 has debt limitations. Those are $1,081,400 for secured debt such as mortgage debt, car and vehicle loans — anything where collateral is pledged to the lender; and $360,475 for unsecured debt, which is everything else, including taxes (unless a tax lien has been filed, in which case it become secured debt), credit cards, personal lines of credit or loans and the like. If a person has above-median income and too much debt, she isn’t qualified to file either Chapter 7 or Chapter 13. What happens then?
Within the federal Bankruptcy Code, the only other option is Chapter 11. Chapter 11 has no debt limits and debtors are not subject to any type of income caps. In Chapter 11 the debtor proposes a plan of reorganization and presents it to the court for approval. The plan can provide for regular payments to creditors for a period of time, as in Chapter 13; or it can provide for the sale of some or all of the debtor’s assets and a distribution of that money to creditors, as in a Chapter 7. It can also provide for both to happen: sale of some assets with an immediate distribution to creditors, followed by periodic payments. Chapter 11 offers more flexibility in setting up payments than does Chapter 13 and it allows the debtor the freedom to manage her own affairs without submitting everything to the trustee, as in Chapter 7.
So why don’t more people file under Chapter 11? The cost is a big factor. For starters, the filing fee is over $1,100 compared to the $335 for Chapter 7 and $310 for Chapter 13. Legal fees are a second huge cost. Fees for Chapter 7 run anywhere from around $500 to $2,500, depending on the size and nature of the debts and assets involved. In Utah, Chapter 13 legal fees are set by a “presumptive” fee schedule, with fees for routine cases ranging from $3,500 to $4,000, again depending on the amount of debt, whether the case is above or below-median, and the monthly payment. By contrast, legal fees in Chapter 11 for even small cases routinely exceed $10,000 and may reach into the millions for large companies. This is because of the complexity of Chapter 11, including monthly and quarterly reports that must be filed with the court; the need to communicate with and get approval from creditors for the plan; and drafting the disclosure statement, which tells creditors everything they need to know about the debtor; and the plan itself. Lastly is the time commitment required of the debtor. In addition to doing everything involved in daily life, the debtor must be a hands-on, active participant in the bankruptcy. In Chapter 7, once the case is filed, the debtor can go on with his life except for possibly providing additional information to the trustee. The same is true in Chapter 13. Once the plan is confirmed it’s just a matter of making the monthly payment for the life of the plan. But Chapter 11 is an ongoing endeavor.
Chapter 11 is the only option under the Bankruptcy Code if a debtor doesn’t qualify for either Chapter 7 or 13. In most cases it’s not an attractive option, but it might be the only option. If you have bankruptcy questions, contact us.