Top 15 Lies About Bankruptcy. Lie #10: Chapter 11 is “Business Only”...

Lie #10: Only Big Businesses Can File for Chapter 11, Not People.

Truth-O-Meter: 

While corporations may be “people” in the eyes of Mitt Romney, there nevertheless are very different rules that may apply to their treatment. Most people believe, for example, that Chapter 11 is the chapter of the Bankruptcy Code reserved only for big businesses. They’re wrong.

This one is pretty simple. The Bankruptcy Code actually has a section 109 that is titled, “Who may be a debtor.” Subparagraph (d) talks about Chapter 11. It says, “Only…a person that may be a debtor under chapter 7 of this title…may be a debtor under chapter 11 of this title.”

So, individuals can file for relief under Chapter 11. (Which is good, since my law partner, Dan Press, and I have written a book, “Chapter 11 for Individual Debtors”.)

There is no reference in any of this to corporations or partnerships, however. How are they eligible? In this case, Mr. Romney is right. Section 101(41) says, “The term ‘person’ includes individual, partnership, and corporation…”

The mere fact that Chapter 11 is available for individuals doesn’t mean that it is an easy procedure. Chapter 11 is the most difficult and complex chapter of the Bankruptcy Code. Very few attorneys who handle the more common consumer Chapter 7 and Chapter 13 cases take Chapter 11 cases. The filing fees are about triple the fees for Chapter 13 ($1,046 vs. $281). The legal fees are significantly higher as well. Make sure that you have an attorney very experienced in handling individual Chapter 11′s in your corner for this one.

But Chapter 11 also can offer much that Chapter 13 cannot. On a recent podcast, we discuss some of these differences. One of the major advantages is the ability to restructure mortgages (other than the primary mortgage on your home), removing arrearages, lowering the interest rate, and reamortizing the loan over 20 to 30 years, something that is invaluable to clients with multiple properties.