Chapter 11 reorganization bankruptcy is not only available to corporations and business entities. The most dramatic development in bankruptcy law is the use of Chapter 11 for individuals (one person or a husband and wife). A Chapter 11 reorganization for individuals can evolve into many forms, depending on what is most beneficial to the client.
The most powerful aspect of a Chapter 11 can be principal reduction of a mortgage. A chapter 11 plan, if properly conceived and confirmed, allows individuals to modify mortgages so that the principal is reduced to the property value. This process is called “cramdown” (sometimes “cram down”). For instance, if a bank is owed $500,000 on a property mortgage, but the value is $200,000, it would normally make little financial sense to retain the property. However a chapter 11 can, in effect, re-write the note and deed of trust so that the amount owed is $200,000 with, usually, payments over 30 years amortized at 4.5 percent. This cramdown or cram down procedure is available to either: (1) properties that have always been your investments; or (2) a property that once was your residence but from which you have moved before the plan is approved.
In addition, as with chapter 7 and chapter 13, the individuals can have general unsecured debt discharged with the only price being, perhaps, a small percentage of the debt paid back through the plan.
The advantages of a chapter 11 reorganization include:
- A chapter 13 plan can be no longer than 5 years , while chapter 11 plans routinely propose modified mortgage payments up to 30 years;
- Chapter 13 is only available to those who have under a certain amount of debt, while there is no debt limit for chapter 11 filings;
- Chapter 13 plan payments must begin within 30 days after the case is filed in bankruptcy court, while a chapter 11 individual may not have to make payments under a plan for several months.