After one makes the critical decision to file for bankruptcy, they must next decide under what chapter of bankruptcy law they will file. This decision is at least as important as the decision to file in the first place. The wrong decision can lead to unnecessary costs and headaches that choosing to file under another chapter could have avoided.
For corporations, the decision is often quite easy. They have the option to either restructure under Chapter 11 or to liquidate the company under Chapter 7. Chapter 13 isn’t available to corporations. They base this decision on their perceived ability to bounce back from financial trouble.
Individuals face a slightly tougher decision and may choose from Chapters 7, 11, and 13. While a corporation can simply sell off its assets and fade away into the night, individuals must go on living and thus must choose very carefully. Both Chapter 11 and Chapter 13 deal with restructuring one’s debt instead of having to sell off all of one’s assets. What then would make Chapter 11 more beneficial to an individual than Chapter 13?
A person’s total amount of debt is the first factor. There is a maximum debt limit for eligibility under Chapter 13. Though most individuals will never come close to this limit, some do. As inflation rises faster than bankruptcy law statutory limits, this becomes more and more common. For instance in California, with its previously super high real estate prices and an equally extreme decline in their value over the last 2 years, many individuals are upside down on their mortgage and own substantially more than their home is worth. That coupled with credit card, medical and other debts can easily put an individual over the limit for Chapter 13 eligibility.
Under Chapter 13, a trustee is automatically appointed to oversee one’s finances. Many people are averse to this and choose Chapter 11 which allows one to maintain control of their finances as long as they prove to the court that they are making progress in repaying debts.
On the down side, Chapter 11 generally costs much more than Chapter 13 and requires extensive paperwork. A bankruptcy attorney is often required just to complete the necessary paperwork that must be filed, adding to the overall expense. Court costs are also higher in Chapter 11 cases.
Though Chapter 11 does offer some unique advantages over Chapter 13, great care should be taken to match one’s individual circumstances to the correct type of bankruptcy. Bankruptcy can be a solution to one’s financial problems, but under no circumstance would you want to make things worse by choosing incorrectly.