In Part 1 of Chapter 11 Bankruptcy Basics, I answered some of the basic questions about what a Chapter 11 is. This series continues with a discussion of some of the things that a Chapter 11 can do.
Why would I want to file Chapter 11? Generally speaking, my Chapter 11 clients fall into three categories. First, are businesses, large and small, that need time to repay and restructure their debt, shed unprofitable contracts, and reorganize their financial affairs. Second, are businesses that want to liquidate their assets and close, but retain more control over the process than is offered by a Chapter 7. Third, are individuals who would file for Chapter 13 but for their owing more money than is allowed under the debt caps.
Once you file, the automatic stay stops all actions against you (or your business) to collect debt or which affect any of your assets. This means that garnishments, foreclosures, repossessions, lawsuits, phone calls, letters and the like all halt.
Can I catch up my mortgage/car/tax/domestic support payments under Chapter 11? Yes. In fact, many individual Chapter 11 cases are filed primarily to do just this.
Do I have to pay everyone in full? It depends. Priority debt, such as certain taxes, domestic support obligations, and unpaid employee wages, must be paid in full over the term of the Chapter 11 Plan. If you want to keep secured property, such as your home or car, any arrearages must be paid in full over the term of the Chapter 11 Plan. In most Chapter 11 cases, just as in most Chapter 13 cases, the general unsecured creditors receive much less than the full amount they are owed.
How long is the Chapter 11 Plan? Unlike in Chapter 13 cases, where there is a five year limit, other than for tax obligations, where there is the same five year limit, there is no limit to the length of time a Chapter 11 Plan can go for. I have seen 20 year Chapter 11 Plans approved by the Court, although they are not typical. Most Chapter 11 Plans last 3-5 years.
Can I lower my mortgage payments under Chapter 11? Maybe. You still can’t “cram down,” or lower your mortgage principal to the value of your home under any chapter of the Bankruptcy Code (at least not yet). But if the property isn’t your home (or “primary residence,” in legalese), cram downs are allowed. You can also “strip off” a wholly unsecured second (or third) mortgage or lien. A strip off turns the secured lien into a general unsecured debt, which is typically paid pennies on the dollar, and upon the successful conclusion of your case, the lien must be released.
Can I claim exemptions under Chapter 11? Absolutely, if you’re an individual. Whatever exemptions are available in your state are available under Chapter 11. Businesses aren’t allowed any exemptions.
More tomorrow…
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