Chapter 11, like Chapter 13, is a reorganization process. It is primarily for businesses but is available for individuals as well. Due to its expense Chapter 13 is usually a better option for individuals, however in certain cases an individual may be ineligible for Chapter 13 due to the debt limitations in that chapter. If this is the case an individual may have no choice except to file a Chapter 11.

Unlike a Chapter 13 or Chapter 7, in most cases the debtor remains in control of its possessions and business affairs as a “debtor in possession” instead of having a trustee appointed. However, this status is very strictly watched by the court and the debtor must strictly abide by the court’s orders to remain in this position. Like the other chapters the automatic stay goes into effect at the time the case is filed.

The debtor must prepare a Chapter 11 plan and file it with the court. It must also prepare, file and have a “disclosure statement” approved by the court. If the disclosure statement is approved by the court it is sent to the creditors with the plan. The creditors may vote on accepting or rejecting the plan. If the plan is accepted it may be confirmed by the court. If the plan is confirmed the debtor receives its discharge. The debtor must then carry out the plan. After the plan is completed a final report is filed and the case is closed.

In a chapter 13 case we first prepare a budget based upon the debtor(s) net income and average monthly expenses. We include secured debt payments, such as a car and/or mortgage payment. Whatever is left over after the budget is prepared is used to repay unsecured debts, such as credit card debts over the life of the plan.

Here are some very simplified examples:

Joe and Mary come to me because they are several months behind on their mortgage, totaling $3,600. They have $14,400.00 in credit card debt. They make $3,500 net per month. They have a mortgage payment of $1,000.00 per month, car payments of $500.00 month. Their monthly expenses are $1,000. So, we have $500.00 per month left over after meeting their expenses and secured debt payments. The first $100.00 of this will go to pay the amount they are behind on their mortgage – it will caught up at the end of a 36 month plan. The remaining $400.00 will go to pay the credit card debt. At $400.00 per month the credit card debt will be paid in full in 36 months.

There are three advantages for Joe and Mary under this hypothetical. First, they can catch up their mortgage and save their home from foreclosure. Second, because of the Automatic Stay (see the article entitled “Bankruptcy Stops Debt Collector Harassment!”) any pending foreclosure, garnishment, or just simple harassment stops while they are in bankruptcy. Third, all interest on the credit card debt stops as of the filing date – saving them thousands of dollars.

Here’s another hypothetical. Instead of $14,400.00 in debt Joe and Mary have $28,800.00 in credit card debt. At $400.00 per month there is only enough money to re-pay 50% of this over the 36 month plan. At the end of the plan Joe and Mary will get a discharge (forgiveness) of the remaining 50%.

The advantages here are the same as before with the additional advantage of the discharge. Chapter 13 requires that the debtor(s) pay as much as they can afford into the plan – but also allows forgiveness of whatever debt can’t be repaid. Theoretically, debtor(s) can repay as little as 1% of their debt.