Chapter 7 Vs. Chapter 11 for Individuals

by Cara O'Neill Google
Individuals can receive relief from crushing debt through bankruptcy.

Individuals can receive relief from crushing debt through bankruptcy.

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Most individuals qualify for a Chapter 7 bankruptcy. This is a good thing since compared to other chapters, filing Chapter 7 is cheaper, results quicker and doesn't require a repayment plan. But not everyone can file Chapter 7. When an individual’s income is too high, and debts exceed Chapter 13 limits, he must file a Chapter 11 in order to receive bankruptcy relief.

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Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, the assets of the filing party are liquidated in order to pay the creditors and the remaining qualified debt is discharged. An individual qualifies to file Chapter 7 when her monthly income is less than the median income in her state of residence for a household of her size. When income exceeds the established limits, the individual may still qualify as long as she passes the “means test.” The means test determines whether the individual makes enough money to make payments to creditors. When this is the case, the bankruptcy petition is dismissed or converted to either a Chapter 13 or Chapter 11, both of which require repayment plans.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy does not immediately erase qualifying debt. Instead, lower monthly payments are made on unsecured debts, such as credit cards, for three to five years. Secured debts, such as house payments and car payments, are not reduced unless a "cramdown" provision applies, when the balance owed is reduced to reflect the current value of the item. The debtor must continue to make payments in order to retain the property. Upon successful completion of the plan, whatever is still owed to qualifying unsecured creditors is wiped out, placing the debtor in a better position than if he had not filed bankruptcy.

Chapter 11 Bankruptcy

When an individual’s debts exceed the Chapter 13 limitations for secured or unsecured debts, a Chapter 11 petition must be filed to entitle the debtor to bankruptcy relief. While both chapters involve repayment plans with the remaining debt being discharged upon satisfactory completion of the plan, debt relief is far more difficult to obtain with a Chapter 11 — and more expensive. This is primarily due to what happens after the meeting of creditors in a Chapter 11 case.

Meeting of Creditors

All chapters are similar in that a debtor must attend a meeting of creditors. At this meeting, creditors may ask questions about the debt and the debtor’s intentions. In a Chapter 13, the bankruptcy trustee and the court decide whether the repayment plan proposed by the debtor is appropriate. In a Chapter 11 case, however, the overall debt owed to creditors is much higher and consequently, the rules are different. Specifically, the creditors risk losing more money and have a much greater stake in the outcome of an approved repayment plan. Because of this, the creditors, not the bankruptcy trustee, vote on the repayment plan. Since all the creditors want as much of the available funds as possible, the approval process can become contentious. Deals must be made with each creditor and it is often difficult and costly to get a Chapter 11 repayment plan approved. The result is that the benefit to the debtor quickly dissipates as legal costs grow.