Individual Reorganization Plans through Chapter 11
Not just for Business
While the vast majority of Chapter 11 cases are filed on behalf of business entities, individual debtors are also eligible to seek protection under this Chapter. Unlike a Chapter 7 or Chapter 13 plan, there are no eligibility requirements or restrictions.
Force Lenders to Reduce Principal through a Chapter 11 Cramdown
Florida ranks among the top five states in the country in percentages of properties underwater and drops in median home values. The numbers of properties worth less than their mortgages is staggering. Even for individuals owning just one rental property can save tens of thousands of dollars in principal reduction utilizing the Chapter 11 cramdown.
How it Works
For rental, commercial, and personal property, the cram-down process can reduce the principal owed on the loan to what the property is currently worth.
For example, an investor who purchased a condominium to use as a rental property several years ago owes $300,000 of principal on the note and has an approximate mortgage payment of $1,610 per month, exclusive of taxes and interests. Due to the collapse in the housing market, the condominium is now worth only $180,000 and the market rate for rental is $1,100. The condo is a toxic asset in that it is worth significantly less than the outstanding loan balance and it cannot generate net positive rental income. A successful Chapter 11 cramdown can force the lender to reduce the principal to $180,000 and lower the interest rate. The new monthly payment under a cramdown could be $859 per month – which would turn the toxic property into a profitable investment again.
Other Advantages for Individuals Filing under Chapter 11
- Reorganization of Debt: In a Chapter 11 case, an individual debtor is granted the opportunity to propose a plan to reorganize his or her debts and payoff creditors. Unlike a Chapter 13 reorganization plan which has payment terms that are strictly governed by the Bankruptcy Code, a Chapter 11 reorganization plan affords the debtor with flexibility. For example, plan payments under a Chapter 13 are restricted to either 3 or 5 years in length.
- No debt limit or means test. In order to be eligible for a Chapter 13 Bankruptcy Case, the debtor must have regular monthly income, non-contingent, liquidated, unsecured debts of less $360,475 and non-contingent, liquidated, secured debts of less than $1,081,400. Chapter 11 does not have any debt restrictions. Further, a Chapter 7 debtor is subject to passing the means test. The means test is a multi factored evaluation of an individuals income compared with local and national averages. If an individual debtor’s income is too high, there is a presumption of abuse which can prevent the debtor from receiving a discharge.
- In many instances, after the confirmation of the plan, the Bankruptcy Court may grant a discharge to the individual debtor who has not completed payments under the plan if the value of property actually distributed under the plan to unsecured creditors is not less than the amount that would have been paid had the debtor liquidated under chapter 7, and if modification of the plan is not practicable.