What is Individual Chapter 11 Bankruptcy and Why Would I File an Individual Chapter 11?

The vast majority of individuals who file bankruptcy chose to do so under either Chapter 7 or Chapter 13, which are the most common forms of consumer bankruptcy. However, there are certain individuals that may instead take advantage of the greater flexibility that Chapter 11 can provide, especially when the individual has considerable and/or income-producing assets to protect and distinctive objectives to attain in bankruptcy.

(For other detailed discussions on chapter 11 procedure, common issues and more, be sure to read Wartchow Law’s Chapter 11 Blog.)

Chapter 11 arguably offers greater flexibility for an individual than other chapters of bankruptcy. A successfully confirmed individual Chapter 11 plan can restructure secured debts such as mortgages on rental properties and liens on other assets, yet without the close supervision of an appointed bankruptcy trustee. While some restructuring can be accomplished in Chapter 13, a Chapter 11 debtor maintains a higher level of control and input in the terms of the restructured debts as negotiated with creditors.

Especially for individuals having multiple real estate holdings, Chapter 11 provides an opportunity to protect non-homestead real estate equity which could otherwise be lost in Chapter 7 or Chapter 13, and opportunity to reorganize the underlying mortgages to rewrite more favorable terms including potentially stripping a wholly unsecured mortgage from commercial and rental real estate.

An individual may also opt to file Chapter 11 bankruptcy when they do not otherwise qualify for Chapter 7 or Chapter 13. In Chapter 7, individuals must be below a certain income level in order to be eligible for Chapter 7 pursuant to the “means test”. For higher income earners that do not qualify for Chapter 7, most can still file under Chapter 13, which typically involves a partial repayment plan over five years after which time any remaining debt is then discharged. Chapter 13 has certain statutory debt limits that, while for most people do not normally present a problem, pose a challenge for individuals that exceed those debt limits, in particular individuals that may have multiple real estate holdings with corresponding mortgages which easily aggregate to exceed the debt limits of Chapter 13. As of the date of this post, the statutory debt limits for Chapter 13 bankruptcy are $1,081,400 in total secured debt plus $360,475 in unsecured debt (see the current Chapter 13 debt limits).

As few general consumer bankruptcy attorneys practice individual Chapter 11s, it is especially important to consult with an attorney who has filed individual Chapter 11s before and can guide you through the more rigorous, yet arguably much more flexible process, on an individual Chapter 11 bankruptcy.

Lynn Wartchow provides initial Chapter 11 consultations to review liabilities and assets affecting an individual Chapter 11 bankruptcy proceeding. For more information on how Chapter 11 bankruptcy may impact your situation, contact Wartchow Law Office for a free bankruptcy consultation. Located in Edina, Minnesota, Wartchow Law represents clients in all forms of bankruptcy throughout the Minneapolis and St. Paul metro area of Minnesota.

What are the Debt Limits for Chapter 13 Bankruptcy?

Click here to see the current Chapter 13 Debt Limits effective April 1, 2016 and valid through 2019.

As of the date of this post, the debt limits for Chapter 13 bankruptcy are $1,081,400 in secured debt plus $360,475 in unsecured debt (see the 2014 debt limits here). These limits include only debts that are not disputed, non-contingent and liquidated. This means that amounts which are not yet decided (for example, a potential award of attorney fees in a pending lawsuit) may not count toward these limits. Taxes (whether dischargeable tax or non-dischargeable tax) are included in the unsecured debt limit calculation and disputing a debt without cause generally does not remove it from either calculation.

These statutory debt limits for Chapter 13 are adjusted every three years and the next adjustment is scheduled to occur in 2013. Note: The 2014 Chapter 13 debt limits have been updated as of April 1, 2013.

If you exceed these Chapter 13 debt limits, you can still file for Chapter 7 bankruptcy assuming that all other eligibility criteria for Chapter 7 are met under the “means test”. However, if you are above the debt limits for Chapter 13 and also above the income qualification for Chapter 7, you may still file an individual Chapter 11 bankruptcy proceeding, which is a more involved and expensive bankruptcy proceeding than Chapter 13 however an individual Chapter 11 has unique opportunities to reorganize certain debts with more favorable terms.

Lynn Wartchow is a bankruptcy attorney located in Edina, Minnesota and representing clients in both Chapter 7 and Chapter 13 consumer bankruptcy proceedings throughout Minneapolis and St. Paul in Minnesota. Contact for a free consultation and more information on options available under Chapter 13 bankruptcy.

Common Reasons for Filing Chapter 13 Bankruptcy

For some people, the bankruptcy code and rules may dictate that you simply do not qualify for Chapter 7, in which case the alternative is to file Chapter 13 “wage earner’s plan”. However, there are reasons why someone may actually choose to file a Chapter 13 rather than Chapter 7, even when they have the option of filing for the more common “straight discharge” Chapter 7 bankruptcy.

Possible circumstances when you must file Chapter 13 (i.e., do not qualify for Chapter 7):

  • Your household income exceeds the applicable median income for the state of Minnesota and you do not have enough other certain expenses to reduce your disposable income in order to qualify for Chapter 7. If your income is too high, you will need to file Chapter 13 instead of Chapter 7. This calculation is determined by the “Means Test”.
  • Regardless of your household’s income level, you still have disposable income every month after payment of all your monthly living expenses. In Chapter 7, you cannot have significant disposable income or your case could be dismissed or converted to Chapter 13.
  • You filed a previous Chapter 7 within the last 8 years so you do not qualify for another Chapter 7 at this time. Chapter 7 can only be filed once every 8 years. Note: a previous discharge in any chapter of bankruptcy will prevent a discharge in subsequent bankruptcy filed within 8 years, meaning that if you file a Chapter 13 within 8 years after a prior Chapter 7, the new Chapter 13 plan must propose a 100% repayment to creditors (i.e., no discharge is allowed in less than every 8 years). Other bankruptcy protections and tools, such as the automatic stay and ability to repay mortgage arrears to fend off foreclosure, are still available in a subsequent Chapter 13 filed within 8 years after a prior Chapter 7 bankruptcy.

When you may choose to file Chapter 13 bankruptcy over Chapter 7:

  • You need to repay mortgage arrears and/or default payments on your car loan in order to prevent foreclosure or repossession of the collateral. In Chapter 13 bankruptcy, you can repay home mortgage arrears over 3 to 5 years in the Chapter 13 plan.
  • You have assets which would be non-exempt in a Chapter 7 filing and would either face surrendering or paying to keep if you filed Chapter 7. In Chapter 13, you can “pay to keep” any non-exempt assets over 3 to 5 years of a Chapter 13 plan.
  • You want to see that your creditors receive some money despite the bankruptcy and even if it means they still won’t get paid in full. Most Chapter 13 bankruptcy plans provide for the proportionate repayment of unsecured creditors anywhere from pennies on the dollar to 100%.
  • You have non-dischargeable debts that you want the flexibility to repay over five years with low or no interest.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Call for a free bankruptcy consultation to understand your options in Chapter 13 bankruptcy.

Bankruptcy and Divorce: What Should Come First?

Divorce is often a precursor to bankruptcy, for either one or both of the divorcing spouses find themselves in need of discharging debts in the face of earning only a single income once again. The difficult question is determining what should come first: the bankruptcy or the divorce.

The answer of course depends on a multitude of circumstances including whether the spouses can cooperate and agree to a joint (and amicable) bankruptcy filing before the divorce is finalized, how long it may be before a divorce decree is entered, which assets owned jointly versus individually, whether there are any joint debts, how the incomes of each of spouse may affect a joint bankruptcy both during a bankruptcy proceeding and after the divorce is final.

When divorce and bankruptcy overlap, the first question is timing. Often family  attorneys may advise their clients to file a bankruptcy before finalizing the divorce, which has the optimistic effect of clearing up those debts so the divorce decree has one less thing to divide up between the spouses. However, there are reasons why it may be better to wait to file bankruptcy until after the divorce is complete, especially for debtors that may owe monetary obligations to their ex-spouse as part of the divorce decree. While child support and alimony (or maintenance, as it is sometimes called) that are based on the financial need of the other spouse are not dischargeable in bankruptcy, certain other financial obligations to one’s ex-spouse may be dischargeable in bankruptcy, including property settlements and other financial obligations that are not based on the financial need of the other spouse. Under some situations, these types of divorce decree obligations can be discharged in a Minnesota consumer bankruptcy filed under Chapter 13.

Another reason to wait to file bankruptcy until after a divorce is finalized: a divorce decree can slap a debt back on one spouse, effectively mooting the entire reason for filing bankruptcy. In Minnesota—which is not a community property state—one spouse typically cannot be held liable for debts incurred solely by their spouse unless both spouses signed the credit agreement (there are some exceptions, such as medical debts which can be enforced against one’s spouse under state statute). A divorce decree usually divides all debts amongst the spouses. For example, the husband may assume the entire responsibility for all joint  and individual credit cards in his name while the wife will take over the homestead and accompanying home mortgages and individual credit cards in her name. If the husband files bankruptcy before the divorce is finalized and discharges his legal responsibility to his credit card companies, the divorce decree can still subject the husband to responsibility to his wife for any payments she is forced to make on the joint credit cards that she will still owe in spite of his bankruptcy because she did not file with him. In this example, while the credit card companies could not sue the husband because of his discharge received in bankruptcy, however they could still sue the wife for the joint debts and the wife, in turn, can then sue her ex-husband for indemnification under the divorce decree if she is forced to pay on the joint credit card debts that were otherwise assigned to him. The point is that you never know how the debts will be divided until the stamp is dry on the divorce decree, and you don’t want to waste a bankruptcy discharge (which you can only get once every 8 years) on debts that may be re-assigned to you in the divorce.

Other issues to be considered when bankruptcy and divorce intersect: equity in a  homestead may not be exempt if it is no longer one’s homestead (a marital lien alone does not satisfy “occupancy” to obtain a Minnesota homestead exemption); child support and spousal maintenance counts as income for the purposes of qualification for Chapter 7 under the means test; an indemnification clause in the divorce decree may undermine the effect of a bankruptcy discharge; unless a full disclosure is made and the divorcing spouses are cooperative, the bankruptcy attorney may have conflict of interest issues that prevent joint representation of divorcing spouses.

Lynn Wartchow is a bankruptcy attorney located in Edina, Minnesota and representing clients in both Chapter 7 and Chapter 13 consumer bankruptcy proceedings throughout Minneapolis and St. Paul in Minnesota.