Comparison of Chapter 11, Chapter 12, and Chapter 13 Bankruptcy for Individual Debtors
Most individual debtors that need to protect valuable property will usually chose one of the so-called rehabilitative bankruptcies—Chapter 11, 12, and 13—which allows the petitioner to keep valuable property by paying creditors, usually for much less than their debt, over time with post-petition earnings and by being able to reject or modify burdensome executory contracts.
However, not all these chapters of bankruptcy are available to every debtor. For instance, only family farmers and fishermen may file under Chapter 12. And some debtors may be restricted to Chapter 11 because their debt exceeds the limits for Chapter 13 or 12.
The main disadvantage of Chapter 11 over Chapter 13 or 12 is cost. It not only costs a lot more to file, but an attorney will also be much more expensive, since there is a lot more work to do. It costs $1,000 to file for Chapter 11 and attorney fees will generally range from $10,000 to $30,000 for an individual debtor. Businesses, of course, could easily pay much more than this—the Lehman Brothers bankruptcy, for instance, is reported to have cost $1.4 billion dollars. However, Chapter 11 is the only reorganization chapter available to them, since Chapter 13 is only available to individual debtors and Chapter 12 is only available to family farmers and fisherman, and both of these chapters have debt restrictions that would eliminate many businesses from eligibility.
Benefits of Chapter 13 Over Chapter 11
Under Chapter 13, only the debtor submits a payment plan for confirmation, although the trustee or a creditor can object, with cause. Creditors have no say in the payment plan, nor do they vote for a plan, and, hence, no disclosure statement is required. A Chapter 11 debtor initially has the right to file a payment plan, but if it is not filed within 120 days, or if the submitted plan has not been accepted by impaired classes of creditors by 180 days, then any party in interest, including creditors, may submit a plan. Additional benefits over Chapter 11 include:
- There is no super-discharge under Chapter 11. All debts that are not dischargeable under Chapter 7, listed in §523(a), are also not dischargeable under Chapter 11.
- A Chapter 13 debtor can pay priority payments over time without paying interest, but a Chapter 11 debtor must pay all priority payments in cash by the effective date of the plan, or pay interest on installments.
- The automatic stay extends to co-debtors or co-signers of the Chapter 13 debtor but not the Chapter 11 debtor.
- A Chapter 13 petitioner can retain his property or business without paying unsecured creditors in full. Chapter 11 has an absolute priority rule that allows a dissenting class of creditors who have not been paid in full to object to the retention of property by the debtor.
- A Chapter 13 debtor can cram down many types of property by paying only the value of the collateral, but a Chapter 11 debtor may be restricted from cramming down by dissenting classes of creditors.
Benefits of Chapter 11 Over Chapter 13
Chapter 11 has no debt limits. A debtor who wants to file under Chapter 13 must have noncontingent, liquidated, unsecured debts of less than $394,725 and noncontingent, liquidated secured debts of less than $1,184,200 as of April 1, 2016 (valid until April 2019). These amounts are increased every 3 years in proportion to the Consumer Price Index. (Noncontingent simply means that the debt does not depend on a future event and liquidated means that the debt is fixed in value.)
A Chapter 11 debtor can take months to file a plan and make payments, whereas a Chapter 13 debtor must either submit a payment plan with the petition or file a plan within 15 days afterward.
There is usually no trustee under Chapter 11, unless one is appointed for cause. The debtor manages the bankruptcy as a debtor in possession. This gives the debtor more freedom from control and oversight and the debtor saves money by not having to pay the trustee's commission.
There are additional advantages for businesses filing under Chapter 11 that, previous to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), also applied to individual debtors, but most of these benefits have been eliminated when Congress modified Chapter 11 for individual debtors to more closely follow Chapter 13.
Benefits of Chapter 12 Over Chapter 13
The code for Chapter 12 bankruptcy has largely been copied from Chapter 13; hence, most of the advantages and disadvantages of Chapter 13 over Chapter 11 also extends to Chapter 12. In addition, Chapter 12 has several advantages over Chapter 13:
- Although Chapter 12 is only available to family farmers and fisherman, they can be organized as small corporations or partnerships while Chapter 13 is only available to individual debtors.
- The debt limit under Chapter 12 is more generous than Chapter 13 and there is no distinction in whether the debt is secured or unsecured—the debt limits are for total debt irrespective of liens. The debt limits are adjusted according to inflation every 3 years, and as of April 1, 2016, the limit for the family farmer is $4,153,150 and for the family fisherman, the limit is $1,924,550.
- A Chapter 12 petitioner has up to 90 days to file a plan in contrast to the 15 days available to the Chapter 13 petitioner.
- A Chapter 12 debtor may modify or cram down a home mortgage by paying only the value of the home rather than the full amount of debt. Currently, this is the only chapter of bankruptcy that allows the cramdown of mortgages, although Congress, in light of the many foreclosures that are occurring in the aftermath of the 2008 - 2009 credit crisis, has been considering extending it to Chapter 13 debtors.
- Property can be stripped of liens more readily under Chapter 12; hence, property can be sold with a clear title.
- The Chapter 12 debtor can extend payments for expensive property beyond the end of the bankruptcy period.
- The Chapter 12 petitioner also has less oversight from the trustee and can delay payments until at least the confirmation of the plan.
The disposable income test determines the amount that the debtor must pay to creditors during the pendency of the bankruptcy. Under Chapter 12, §1225(b)(1)(C) stipulates that as long as the payments are not less than the projected disposable income, then the court must approve the plan. This amount cannot be increased, even if the debtor actually earns more income during the bankruptcy than what was projected in the plan. Because there is no equivalent section under Chapter 13, some courts have forced debtors to pay more if their actual income turns out to be more than their projected income.
The only drawbacks of Chapter 12 compared to Chapter 13 is that:
- there is no super-discharge, which only includes a few types of debts anyway, most notably taxes that were due more than 3 years before the bankruptcy filing date,
- and the debtor may be forced to pay out all disposable income for up to 5 years, even if the debtor's family income is below the state median—under Chapter 13 it would be restricted to a maximum of 3 years.