Individuals who file Chapter 11 experience the reorganization bankruptcy system in ways that are similar to corporations that file Chapter 11, but are also similar to individuals who reorganize in Chapter 13. If individuals want or need to reorganize their finances, and have more than $336,900 in unsecured debt or $1,010,650 of secured debt, they cannot file a Chapter 13 bankruptcy. Chapter 11 is the only option. The same circumstances that cause individuals to file Chapter 13 influence their choice to file Chapter 11:
- Save home from foreclosure
- Save vehicles from repossession
- Pay past due tax debt
- Pay past due domestic support obligations
- Reorganize sole proprietorship business
- Cram down secured debt to value of property
- Strip off second mortgages without value in property
- High income household prohibited from filing Chapter 7
The principal difference in a reorganization plan under Chapter 11 from a plan under Chapter 13 is that Chapter 13 plans can vary between 36 months to 60 months while Chapter 11 plans must be 60 months long.
Starting an individual Chapter 11 case is much like a corporate Chapter 11. A petition and schedules are filed with the Court, which causes the automatic stay to be effective. Creditors must then stop all collection actions against the individuals debtors. Within a week of filing, the individuals and their counsel must meet with the United States Trustee (UST) to review the UST's operating guidelines. The guidelines are the rules by which the individuals must play while in Chapter 11. The guidelines require individuals to maintain insurance on their properties, to open new bank accounts (with the notation "Chapter 11 Debtor in Possession" on the checks), and to file monthly reports showing all income into the individuals' household, and all expenses, including with the reports all monthly bank account statements.
Several weeks after the meeting with the UST, the individuals must attend a meeting of creditors, also known as the Section 341 meeting. The meeting is conducted by the UST and the individuals must testify under oath. Creditors are invited to ask questions about the individuals' finances and their expected reorganization.
After the meeting, the next few months are used to negotiate with secured creditors on the retention or surrender of assets, and assume or reject leases. Hopefully, the individuals will find their monthly budget easier to maintain without paying pre-petition unsecured debt.
Within 3 or 4 months of the Section 341 meeting, the individuals prepare and file a disclosure statement and plan. As in corporate Chapter 11 cases, the disclosure statement is the plan English version of the more legalistic Chapter 11 plan. A disclosure statement is intended to clearly and accurately state the individuals' financial history and present circumstances, as well as the roadmap for the future, it the Court and creditors agree to the reorganization plan.
Creditors' claims are placed into "classes" with each secured creditor in a separate class and all unsecured creditors in the same class. The treatment of each class in the plan is described in the disclosure statement. Classes of creditors may be "impaired" or ‘unimpaired", depending upon whether the contractual rights of the creditors are being changed by the plan or not. The Court must approve the adequacy of the disclosure statement before it is sent to creditors. Once the disclosure statement is approved, and is mailed to creditors, along with the plan, creditors may vote on the plan.
A major difference between a corporate Chapter 11 and individual Chapter 11 is the absence of the "absolute priority rule" in individual Chapter 11 cases. In corporate Chapter 11 cases, the "absolute priority rule" prohibits the ownership of a corporation from continuing to control the corporation unless unsecured creditors are paid in full (if the unsecured creditors object to the plan or vote against it). The "absolute priority rule" does not exist in individual Chapter 11 cases, thereby removing one of the most difficult obstacles to a successful reorganization. As long as the individuals in Chapter 11 propose a plan which pays creditors more than they would receive in Chapter 7, and provides creditors with all of their disposable income over 5 years, the plan must be approved by the Court.
The concept of "disposable income" is borrowed from Chapter 13, although the "means test" in Chapter 13 does not play a role in determining "disposable income" in Chapter 11. Disposable income in Chapter 11 is determined on a case-by-case basis by the Court, looking at the individuals' monthly income, reduced by the individuals' reasonable monthly living expenses. What constitutes disposable income in a 13 may not be disposable income in an 11; individuals in an 11 usually have higher incomes and higher living costs than individuals in Chapter 13.
The same voting rules that otherwise apply in a corporate Chapter 11 also apply in an individual Chapter 11. For an "impaired" creditor class to approve a plan, more than ½ in number and 2/3 of the claim amounts of the creditors in the class must vote in favor of the plan. However, if a class does not vote in favor of the plan, the Court can still approve the plan, provided that the Chapter 7 liquidation test is met and the individuals are contributing all their disposable income to the plan.
Once the Court approves the plan, the individuals must begin making their plan payments for the 5 year time period. After the conclusion of the plan payments, the individuals provide the Court with an accounting demonstrating that they have met their obligations under the plan. The Court will then issue the individuals' bankruptcy discharge and close the case.