When Should a Consumer File for Chapter 11 Bankruptcy?

When a consumer wants to file for reorganization bankruptcy, that consumer will typically file for Chapter 13 bankruptcy. Yet Chapter 11 bankruptcy is also a type of reorganization bankruptcy, and in certain situations, consumers file for Chapter 11 instead of Chapter 13. In most cases, the reason that a consumer will file for Chapter 11 bankruptcy instead of Chapter 13 bankruptcy is the debt limit. Relatively recent changes to the Chapter 13 debt limits have resulted in an increase in the debt limits, thereby making it easier for consumers to qualify for Chapter 13 bankruptcy based on the amount of their debt. However, circumstances certainly may arise in which a consumer is ineligible for Chapter 13 bankruptcy due to the amount of debt they owe. Under such circumstances, the consumer will usually file for Chapter 11 bankruptcy.

Our Oak Park consumer bankruptcy attorneys can provide you with more information.

Understanding Debt Limits in Chapter 13 Bankruptcy Cases

What are debt limits in a Chapter 13 case? In short, if a consumer has more than a certain amount of secured or unsecured debt, that consumer will not be eligible to file for Chapter 13 bankruptcy. The debt limits are adjusted every three years for Chapter 13 bankruptcy filings, and the debt limits were adjusted very recently. As of April 1, 2022, according to the U.S. Courts, the debt limits are $465,275 in unsecured debt, and $1,395,875 in secured debt. Those debt limits are good through March 31, 2025, at which point they will increase again to account for inflation and rising costs.

Generally speaking, most consumers who want to file for Chapter 13 bankruptcy do not have issues with the unsecured debt limit. Even though that limit is much lower than the secured debt limit, most consumers who are filing for Chapter 13 bankruptcy do not have credit card debt, medical debt, and personal loan debt (i.e., the majority of most unsecured debt) that exceeds $465,275. However, it is more common than you might think for a consumer who wants to file for Chapter 13 bankruptcy to have unsecured debt in excess of $1,395,875. Keep in mind that secured debt includes any debt for which there is collateral, including auto loans and mortgages. While $1,395,875 is still a relatively high debt limit, it is not especially uncommon, particularly in expensive urban areas and Chicago suburbs, for a debtor to owe more on a mortgage than the Chapter 13 debt limit.

Filing for Chapter 11 Bankruptcy When Your Debt Exceeds the Limits

Chapter 11 bankruptcy is typically used by businesses that want to reorganize debts, but it is possible for a consumer to file for Chapter 11 bankruptcy. You should know that the costs are a bit higher than they are for Chapter 13 bankruptcy, but you can still reorganize your debts through a Chapter 11 case.

For homeowners in particular who have secured debt in excess of $1,395,875, Chapter 11 bankruptcy may be the only option for reorganizing debt. When a significant portion of your debt is mortgage debt, you may also be facing foreclosure. Like Chapter 13 bankruptcy, Chapter 11 bankruptcy can give homeowners the ability to stop a foreclosure action from moving forward due to the automatic stay, and then the homeowner can reorganize debts and catch up on mortgage payments.

Contact an Oak Park Bankruptcy Attorney

If you have questions about Chapter 13 versus Chapter 11 bankruptcy, one of our experienced Oak Park bankruptcy attorneys can help. Contact the Emerson Law Firm to learn more.


See Related Blog Posts:

Important Bankruptcy Terms to Know

How Does Consumer Debt Collection Work?

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