Individual Chapter 11 v. Chapter 13 – Which one is right for you?

INDIVIDUAL CHAPTER 11 CASE V. CHAPTER 13 CASE

Part of every bankruptcy attorney’s job is the proper choice of which Chapter to recommend to a client when the filing of a Bankruptcy case is needed. The Client needs all the information they can get to make an appropriate decision as to whether to file a case and under which Chapter.

The individual Chapter 11 has been an option for several years due to the real estate slump and other concerns. But, what are the differences between the individual Chapter 11 and a Chapter 13 case?

CHAPTER 13 IS NOT FOR EVERYONE

There are many reasons why a Chapter 11 case may be preferable to a Chapter 13 case. Debt limit restrictions, liquidation issues which can’t be cured in the 5 year Chapter 13 period, lack of regular income or lack of ability to cure a mortgage arrearage within the 5 years of the Chapter 13.  Some qualify for Chapter 13, but aren’t eligible for discharge because of a prior discharge.

For these clients and others, an individual Chapter 11 case may be the answer.  Some of the possible advantages of an individual Chapter 11 over a Chapter 13 case include:

  • No Chapter 13 debt limits to prevent filing a reorganization
  • No means test – income and expenses are calculated as a normal monthly budget
  • No unsecured plan payments until the Plan is confirmed, often 6-12 months after filing
  • Greater flexibility in structuring mortgage and unsecured debt under the Plan
  • No limit on Plan length—reasonable to creditors is standard used by Judges to approve length
  • Relaxed income requirements to allow for infrequent payments or payments upon a sale
  • No requirement that the debtor make periodic payments
  • No 910 day restriction on motor vehicle loan strip-downs
  • No Trustee fees once case is administratively closed – usually about 12 months after filing
  • The ability to restructure non-residential property loans over a new amortization period and interest rate

One of the biggest advantages of an individual Chapter 11 case is the flexibility in addressing mortgage debt on homestead property.  Chapter 11 provides an opportunity to restructure homestead mortgage debt in a much more manageable way. Being able to structure a repayment plan for arrears over longer than five years makes it possible for debtors who could not afford the high Chapter 13 Plan payment to save their homes. Additionally, the mortgage mediation program is available for Chapter 11 debtors to attempt to modify the homestead under the HAMP or other modification program.

CHAPTER 11 DIFFERENCES

One of the biggest differences is the average fee associated with a Chapter 11 case—it’s a lot higher than a typical Chapter 13 fee due to the increased workload in a typical Chapter 11 case. The increased expense may put Chapter 11 out of reach for some debtors.

Other differences include:

  • Both creditors and the court must approve the Plan— There is no way of ensuring that you have enough votes from the appropriate classes to confirm the Plan;
  • Separate “debtor-in-possession” bank accounts are required, and the client must  file monthly reports with the U.S. Trustee;
  • There is no “Chapter 11 Trustee,” and the U.S. Trustee takes a much less active role in the case, putting nearly all of the burden for moving the case forward on the debtor’s attorney;
  • No absolute right to dismiss like in Chapter 13 – generally case is converted to a Chapter 7 and Trustee liquidates non-exempt property;
  • No co-debtor stay in a Chapter 11 case; and
  • Adequate protection payments must be made if a creditor so requests.

CONCLUSION

Chapter 11 is a complicated and expensive process. It requires the right client who is willing to put in the work required and the right attorney to see the case through to confirmation. But, when used effectively, it can provide the means to save assets and relieve debt burdens that may otherwise not be eligible for Chapter 13 relief.

At Mickler & Mickler, we attend Court and see the bankruptcy trustees and judges in action several times a week. We have the experience to guide you to the right decision about whether to file a case, and if so, what Chapter to file.

Please contact Mickler & Mickler at 904.725.0822 or bkmickler@planlaw.com. We will be happy to set you up a free appointment to discuss your situation and potential solutions.

 

Bryan Mickler

Who is the Chapter 13 Trustee in Jacksonville, FL?

WHO IS THE CHAPTER 13 TRUSTEE?

When any potential Chapter 13 client speaks to our office about modifying a mortgage through a Chapter 13 filing or saving other assets, we always talk to the client about making payments through a Chapter 13 Trustee. But who is the Trustee and what are his duties in the case?

GENERAL DUTIES OF THE CHAPTER 13 TRUSTEE IN JACKSONVILLE CHAPTER 13 CASES

The most basic duty of the Chapter 13 Trustee is to collect the monthly Chapter 13 payments from the filer and disburse that money to the creditors based on the Chapter 13 Plan and claims filed. It is the steps prior to the disbursement of the money that are really critical to the filer.

Initially, a Chapter 13 Plan is filed by the Debtor. That Plan is typically an estimate of what the Debtor thinks the payments will be in a future Confirmation Order to be signed by a Judge. The Plan is based upon the expected mortgage payment, car payments, tax payments and the left over money to the unsecured creditors. Normally, secured debts such as mortgage payments, property taxes and car payments are verified by the secured creditors. So, if the mortgage payment in the Plan does not match what is called for in the note and mortgage, then the secured creditor will file an objection to the Plan and have the amount corrected.

It is the unsecured creditors who rely upon the Chapter 13 Trustee to watch out for their interests during the course of the Chapter 13 case. There are several ways that the Chapter 13 will seek to maximize recovery for the unsecured creditors:

INCOME MINUS EXPENSES

The Chapter 13 Trustee will do a basic review of the Schedules to determine if the Debtor’s budget appears to include too little income or expenses that are too high. If the Chapter 13 Trustee feels that either income or expenses are not correct, he can file an objection to the Plan and ask the Judge to increase the Plan payments based upon the objection. This review is different from the means test review below. The budget prepared by the Debtor is a “snap shot” of the current actual income and expenses, not the formula utilized by the means test.

CHAPTER 13 AND THE MEANS TEST

The Chapter 13 means test is similar to the Chapter 7 means test in that it sets up the income in the exact way of the Chapter 7 test – 6 months of household income averaged to a monthly amount. Then, expenses are subtracted from the income figure to determine a net disposable income. The left over figure is used to determine how much money (if any) needs to be paid to the unsecured creditors in a Chapter 13 Plan. Unsecured creditor are such bills as credit cards, stripped off second mortgages, medical bills, etc. that have been included in a bankruptcy filing. In a Chapter 13 filing, you generally cannot deduct future expenses for property that will be surrendered in a Chapter 13 case. That is a big difference from a Chapter 7 filing, where you can deduct future payments if you are contractually obligated but going to surrender the property.

OTHER AREAS TO INCREASE UNSECURED DISTRIBUTIONS

The Chapter 13 Trustee will also seek to review the yearly tax return. If the tax return shows a refund or increase in income, the Trustee will seek to modify the Plan to recover the refund or increase future payments based upon the increase in income. Additionally, settlements of lawsuits which result in a monetary award to the debtor generally result in the Chapter 13 Trustee attempting to recover the proceeds of the suit to distribute to the unsecured creditors. If the Debtor inherits any type of monetary award, the value of the inheritance may be recovered by the Chapter 13 Trustee and distributed to the unsecured creditors. The same is true for sales of property during the Chapter 13 Plan.

WHY DOES THE TRUSTEE TAKE MONEY AFTER THE FILING OF THE CASE?

All of the above are examples of monetary changes that occur after the filing of a Chapter 13 case. Unlike a Chapter 7 case, the Bankruptcy Code requires that all “disposable income” be paid to the unsecured creditors. That disposable income may come in to the case two or three years after the case had been filed. Normally, in a Chapter 7 case, the money would belong to the debtor as long as the right to receive the funds did not exist on the petition date. However, in Chapter 13, the funds belong to the unsecured creditors if they are considered disposable income.

CONCLUSION

Determining disposable income is an ongoing process in Chapter 13. What about future medical expenses due to the car accident suit? What about burial expenses related to an inheritance? All sorts of issues come up when trying to determine what income is truly “disposable”. At Mickler & Mickler, we attend Court and see the bankruptcy trustees and judges in action several times a week. We have the experience to guide you to the right decision about whether to file a case, and if so, what Chapter to file.

Please contact Mickler & Mickler at 904.725.0822 or bkmickler@planlaw.com. We will be happy to set you up a free appointment to discuss your situation and potential solutions.

Common Bankruptcy Myths

Common Bankruptcy Myths

Everyone has heard the horror stories about filing bankruptcy. The reality is usually very different. Common myths include the loss of clothing, furniture and all personal property as soon as you file bankruptcy. How about the one where you lose your home since you filed bankruptcy? Or maybe it’s the myth that you get to keep one car when you file for bankruptcy? That you will have a bankruptcy trustee showing up at your home with no notice to inspect and appraise all of your assets as soon as you file? That all of your friends and neighbors will receive a notice of your filing? All of these are common statements when people come to our office.

Most of the above myths have resulted from a simple mistake that people make in filing bankruptcy. The mistake is not obtaining the proper legal advice about whether to file and potential issues that may arise after filing. The first step to help overcome these common misconceptions is to seek professional bankruptcy advice. Don’t rely on family, friends, co-workers or others to tell you what the law is in bankruptcy. Even if that person has filed their own case, every case is unique and may be very different from your situation. Seek professional advice from an attorney who only practices bankruptcy law and is before the bankruptcy court on a weekly basis.

At Mickler & Mickler, we attend Court and see the bankruptcy trustees and judges in action several times a week. We have the experience to guide you to the right decision about whether to file a case, and if so, what Chapter to file.   When you contact our office, we can help you avoid any horror story in your case with sound legal advice.

Please contact Mickler & Mickler at 904.725.0822 or bkmickler@planlaw.com. We will be happy to set you up a free appointment to discuss your situation and potential solutions.