Chapter 11 Bankruptcy
A Chapter 11 Bankruptcy is typically a business reorganization. It can be filed by a corporation, partnership, or individual in business. It can also be filed by an individual who does not own or operate a business.
SIMILARITIES BETWEEN CHAPTER 11 AND CHAPTER 13
Chapter 11s are similar to Chapter 13s in several ways:
Under both Chapter 13 and Chapter 11, the debtor (the party filing the bankruptcy petition) can continue operating in business while proposing a plan of reorganization to creditors.
Under both a Chapter 13 and a Chapter 11, it is likely that the debtors plan will pay only a portion of the total debts.
Under both a Chapter 13 and a Chapter 11, the debtor can “strip” a second lien (or third lien) on a home mortgage (by which is meant that the junior lien becomes an unsecured debt) by proving to the court that the value of the home is less than what is owed on the first.
For example, let’s say that home has a value of $600K, and has a first mortgage of $750K and a second of $250K. Since the value of the home is less than is owed on the first mortgage, the second mortgage can be “stripped” and turned into an unsecured debt meaning that when the debtor has completed making payments under a 5 year plan, the second is no longer owed, and no longer has a lien on the house. Thus, the debtor was able to increase the equity in his home (or actually to decrease the negative equity) by $250K.
DIFFERENCES BETWEEN CHAPTER 11 AND CHAPTER 13
One of the main differences between Chapter 11 and 13 is the eligibility requirements. Chapter 13s can only be filed by individuals, not by corporations, LLCs or partnerships. Further, a Chapter 13 can only be filed by an individual (including a married couple) who has secured debts (such as mortgages on real estate, or loans on automobiles or equipment) of less than $1,184,200 and unsecured debts (such as credit cards, personal loans, and medical bills) of less than $394,725. These amounts are adjusted periodically to reflect changes in the consumer price index.
On the other hand, a Chapter 11 can be filed by a business entity, and has no debt limit.
The biggest difference is that a Chapter 11 is far more complicated (and therefore more expensive) than a Chapter 13.
However, for an individual whose debt exceeds the debt limit, a Chapter 11 may be the only option.