Individual Chapter 11 – How Much Will My Plan Payment Be?

Chapter 11 is most often associated with business bankruptcies; however, it is also a necessity for a few high-income individuals who have debt limits that surpass the Chapter 13 statutory requirements. You see, if you have more than approximately $360,000 (this number increases every now and then) in unsecured debts or $1.1 million in secured debts, you are not qualified to file a Chapter 13. Antiquated? Of course, but what else do you expect from Congress?
While Chapter 11 has it’s own pitfalls (significantly higher attorneys’ fees for one), it offers a much higher degree of control by the filer. When you file a Chapter 13, you are proposing a plan to repay a portion of your debts. This plan must be overseen by the Chapter 13 trustee assigned to your case. The Chapter 13 trustee is there to ensure that creditors are being treated fairly, among other things, but it simply adds another person to deal with in attempting to get a plan confirmed. If you file a Chapter 11, you still propose a plan of reorganization, but there is no Chapter 13 trustee to object to your plan.
In a Chapter 13 plan, your plan payments are determined by three tests, dependent upon the facts in each case.  Your payment is typically based on your disposable income after subtracting your income from your reasonably necessary expenses on Schedule J.  If you do not propose to pay creditors all your disposable income over a 5-year period, your plan will probably not be confirmed.
In a Chapter 11, there is no trustee to ensure that this occurs, and the code does not provide that your Chapter 11 plan must pay out all disposable income over a 5 year period.  The only way a Chapter 11 debtor can be forced to pay the equivalent of his 5-year disposable income through the plan is if an unsecured creditor objects. Notice I said “objects” and not “reject” the plan.  Unlike a Chapter 13 plan, your creditors are given the option to vote to accept or reject your plan of reorganization. All you need is one vote from an impaired class of creditors to push your plan through.  This is called “cram-down”, because you are essentially cramming the plan down the throats of your creditors, but I digress.  Many unsecured creditors will simply file a “rejection ballot” instead of ofrmally objecting to the plan. Most courts agree that this is not tantamount to filing a formal objection, and the only way a debtor is forced to pay all his disposable income he would have earned over 5 years to the plan is if an unsecured creditor objects to the plan.
Another advantage is that even if one is forced to pay the equivalent of 5-years disposable income through the plan,  the plan does not have an applicable commitment period like a Chapter 13, meaning that your plan can be much longer than 5 years if required. For instance, if your 5-year disposable income is $60,000, you would be forced to pay $1,000 per month in a Chapter 13 plan. If Chapter 11, you could pay $500 per month for ten years, 6 annual payments of $10,000 for ten years, 5 annual payments of $15,000, or any other variation that is fair and equitable to your creditors.
The take-home message is this: a Chapter 11 bankruptcy can be an extremely powerful tool for those that can afford it. It offers the debtor significantly more control over his financial affairs (as well as the ability to keep using credit cards), and the possibility, if no unsecured creditors object, to pay significantly less over time than in a Chapter 13.