Chapter 11 Bankruptcy for Individuals Frequently Asked Questions
by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
Chapter 11 Bankruptcy can be used by both people and businesses.
If a person has over about $1.3 million in secured debt – or over about $380,000 in unsecured debt, you do not qualify to file a Chapter 13 Bankruptcy case. At the same time, you may not be able to file a Chapter 7 case if you earn too much money and if the means test disqualifies you. This is where a personal Chapter 11 Bankruptcy can help you.
Here are Frequently Asked Questions about Individual Chapter 11 Bankruptcy
Why would I file a Chapter 11 Bankruptcy instead of another type of bankruptcy?
You would consider filing a Chapter 11 case if your debts disqualify you from filing a Chapter 13 case and if you are not eligible to file Chapter 7.
Also, think about filing a personal Chapter 11 case if you have large judgments against you that are accruing interest. This is because in Chapter 11, you pay no post-petition interest on unsecured claims.
Also, think about filing a personal Chapter 11 case if your creditors are interested in helping you. For example, if you have loans at several banks and the banks are friendly and willing to help you, Chapter 11 may be just what you need.
How long will I be in a personal Chapter 11 Bankruptcy?
From the time your Chapter 11 case is filed, it can take months and possibly more than a year until your reorganization plan is confirmed.
Why does a personal Chapter 11 Bankruptcy take so long?
First, you have to file a reorganization plan and disclosure statement with the court. The bankruptcy court then must approve the disclosure statement’s form. The court can confirm your reorganization plan only if at least one class of creditors votes for your plan. The bankruptcy court must conclude that your plan is “fair and equitable” for any class that does not accept the plan. You’re much better off negotiating a plan that’s agreeable to all classes or creditors, which takes time and is costly.
What is a Chapter 11 Reorganization Plan?
A Reorganization Plan is a document that classifies your creditors that have similar types of claims. Every secured creditor is a separate class. Unsecured creditors are a class of their own. Priority creditors include claims for alimony, child support, administrative expenses, and tax claims.
The Plan outlines how you intend to treat each class of creditors. Each class of creditors can have a different amount due, payment terms and interest rate.
What is a Chapter 11 Disclosure Statement?
A Disclosure Statement is a document that you file with the court and give to all of your creditors. It outlines (1) your financial history, (2) why you filed a Chapter 11 bankruptcy, and (3) how you propose to resolve your financial problems. In addition, it gives financial and other facts necessary for the creditors to make wise decisions about whether they should accept your plan.
What does it mean to “accept” a Chapter 11 Reorganization Plan?
If your Reorganization Plan is approved by the bankruptcy court, then each creditor receives a copy of your plan and has the right to vote on it. Your creditors can decide to “accept” or “reject” your Chapter 11 plan. Your plan is deemed to have been accepted when a class of creditors votes is favor of the plan by 2/3 in amount and a majority in number. The plan is binding on the creditors in the class even if they voted against it.
Who can propose a Reorganization Plan in a Chapter 11 Bankruptcy?
As the debtor, you have the legal right to propose the Reorganization Plan before anyone else. This is called the “exclusivity right.” This period in which you have the sole or exclusive right to file your Reorganization Plan can be extended or shortened by the Court. After that period, a creditor or another party in interest may propose a plan.
What is the purpose and role of the United States Trustee?
The United States Trustee oversees all Chapter 11 bankruptcy cases, as well as all other bankruptcy cases. He can advise the bankruptcy judge whether you as the debtor are doing what’s required under Chapter 11 Bankruptcy.
You must make monthly reports to the U.S. Trustee showing your income and expenses while you’re in Chapter 11. You must make quarterly payments to the U.S. Trustee as long as you’re in Chapter 11.
Can a creditor move to appoint a Trustee for me? And what happens if this takes place?
If you engaged in dishonest conduct, any party in interest could move for the appointment of a Trustee to take over your Chapter 11 case. This is why it’s important for you to disclose your activities before and during your bankruptcy so I can advise you, especially if you are at risk of having a trustee appointed.
What are the chances my Chapter 11 Bankruptcy will succeed?
Chapter 11 cases for individuals are hard. Your chances greatly increase if you’re working with an experienced bankruptcy lawyer. Also, your chances go up if you can develop a plan that can garner the support of your creditors. Last, your likelihood of success increases if you choose a lawyer who is familiar with the bankruptcy judges, the U.S. Trustee, and the creditors’ bar.
What will my Reorganization Plan involve?
Similar to Chapter 13, your Reorganization Plan will likely require that you pay all of your disposable income during a five-year period. However, different from Chapter 13, you will probably apply to the bankruptcy court for authority to spend money from your earnings according to an agreed upon budget.
In addition, you’ll have to take into account income tax considerations. Your Chapter 11 bankruptcy estate is an entirely separate taxable entity. So make sure you discuss this with your bankruptcy lawyer and your accountant.
What will my Chapter 11 Bankruptcy cost?
Personal Chapter 11 Bankruptcy cases require a lot of time and attention. The bankruptcy court regulates fees in individual Chapter 11 Bankruptcy cases. In addition, the U.S. Trustee might have input about fees. Your lawyer will work out a suitable retainer and apply to the court occasionally for added fees.
Must I file for Chapter 11 Bankruptcy with my spouse?
No, not necessarily. It depends on your spouse’s financial situation. A joint Chapter 11 Bankruptcy case with your spouse is really two separate Chapter 11 cases. For procedural purposes, these can be handled together.
Can I file a Chapter 11 Bankruptcy case simultaneously with my business partner?
Yes, you might want to do this. However, you and your partner will need different lawyers because your interests are different from those of your partner’s, even though you may have many creditors in common.
Can I file a Chapter 11 Bankruptcy case simultaneously with my corporation?
Yes, you can. You may want to address the company’s needs first. In your corporation’s bankruptcy, you may be able to get a stay of actions against you. If you need to file an individual Chapter 11 Bankruptcy case while your corporation is in Chapter 11, you and the company will likely need separate lawyers because you and the corporation have different and conflicting legal interests.
What are the practical considerations for individual Chapter 11 Bankruptcy cases?
(1) You must get the Bankruptcy Court’s permission to use rental income or other proceeds or accounts that have been pledged to one of your creditors.
(2) Every month you must file operating reports with the U.S. Trustee.
(3) You will need to open new bank accounts called “debtor-in-possession” accounts since your finances will be under Bankruptcy Court supervision.
(4) You will have to budget very carefully because you will have added needs for cash in Chapter 11 Bankruptcy.
(5) Some creditors may want an advance payment on their claims, which means you may need to raise money from outside sources to fund your Reorganization Plan. This means you might have to arrange debtor-in-possession financing, post-petition financing or financing for your exit strategy. You should, in fact, do this before you file your Chapter 11 Bankruptcy case. In addition, you’ll need to solidify your relationships with your creditors because you’ll need them to have an interest in your financial survival.
What are my chances of success in Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy cases for individuals are hard. Your best chance for success is to work with an experiences bankruptcy lawyer who knows individual Chapter 11 cases. In fact, many judges won’t allow a lawyer to represent a client in an individual Chapter 11 Bankruptcy case unless the lawyer is experience in those types of cases.