Consumer Debt and Chapter 11 Bankruptcy

When consumers file for bankruptcy, we usually hear about a Chapter 7 or Chapter 13 bankruptcy filing. However, according to a recent article in Forbes Magazine, there are certain situations in which an individual might file for Chapter 11 bankruptcy instead.
Filing for Personal Bankruptcy Under Chapter 11
The Forbes Magazine article focuses on the current decision of rapper 50 Cent to file for bankruptcy. As it explains, “50 isn’t the first to go down this financial distressed path, but what is interesting is the type of bankruptcy he’s filed for.” Why is that? In short, “it’s somewhat unusual for individuals to file for Chapter 11; it’s a strategy often used by big companies and partnerships.” Millions of Americans file for consumer bankruptcy under Chapter 7 and Chapter 13 each year, while the number of Chapter 11 individual filings typically only number in the low thousands.
What are some of the reasons an individual might file for Chapter 11 bankruptcy? First, it is important to understand how Chapter 11 bankruptcy works. Somewhat similar to a Chapter 13 bankruptcy filing, Chapter 11 bankruptcies allow for the reorganization of debts. In other words, debtors don’t have to deal with the liquidation of their assets in order to have their debts discharged. Instead, debts are reorganized, and debtors make payments according to pre-arranged plans.
Here are some key facts about Chapter 11 bankruptcy:
  • According to Forbes Magazine, it is “among the most complex” forms of bankruptcy.
  • Chapter 11 is typically used by businesses (you might remember hearing, for instance, about General Motors or Washington Mutual filing for Chapter 11 bankruptcy a few years back), but in certain cases, individuals can also file under Chapter 11.
  • Through Chapter 11, individuals can reorganize their debts or restructure a particularly large sum of personal debts.
  • In a very small number of cases, individuals must file for Chapter 11 bankruptcy. Having more than $336,900 in unsecured debt or $1,010,650 in secured debt means that an individual is required to file under Chapter 11 (rather than Chapter 13).
Large Amounts of Unsecured Debt
The most common reason that individuals file for Chapter 11 is that they have particularly large sums of unsecured debt. As we mentioned above, debts of a certain amount require that an individual file for Chapter 11. If you want to reorganize your debts and you have more than the federal amount of debt permitted for a Chapter 13 bankruptcy, Chapter 11 is likely going to be the only route to restructuring debts. In most situations, accruing such substantial debt usually means that the debtor’s income is too high to pass the means test for Chapter 7.
In fewer cases, individuals can also choose to file for Chapter 11 if they want to restructure a mortgage. Typically, these individuals have invested in real estate and want to use a Chapter 11 bankruptcy to lower the principal balance of a mortgage loan, lower the interest rate, and/or extend the repayment term.
However, Chapter 11 bankruptcies are particularly complex. They can also take significantly longer than Chapter 7 or Chapter 13 bankruptcies, and thus a Chapter 11 bankruptcy is not preferable to most individuals. If you have questions about the chapter under which you should file for bankruptcy, it is important to speak with an experienced Oak Park bankruptcy attorney. Contact the Emerson Law Firm today to discuss your situation.
See Related Blog Posts:
Department of Education on Bankruptcy and Student Loans

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