Individuals account for more than a quarter of chapter 11 bankruptcy filings, and this share has grown over time. That's according to the results of the “National Study of Individual Chapter 11 Bankruptcies,” commissioned by the ABI Endowment Fund.
The empirical study examined how and why individuals decide between chapter 11 and chapter 13 when filing for bankruptcy. “For individuals, chapter 11 is more expensive and complicated than the much more common chapter 13 because the applicable rules are a hybrid of those that apply in chapter 13 and those that apply to entities in chapter 11,” according to Profs. Richard M. Hynes, principal investigator, Anne Lawton, associate investigator, and Margaret Howard, reporter for the study. “Some debtors may be forced into chapter 11 by chapter 13's debt limits, but many debtors who are eligible for chapter 13 choose chapter 11.”
Individual chapter 11 debtors have much higher incomes, substantially more assets and much more debt, and they are far more likely to operate a business, according to the study. As a result, they are more likely to have complicated cases and to have difficulty complying with chapter 13's tight deadlines. “Chapter 11 debtors also have substantial real estate interests (and substantial mortgage debt that they need to modify), and they may, therefore, need plans of reorganization that extend beyond five years,” according to the researchers.
The study found that a little more than a third of individuals in chapter 11 "succeed" by confirming a plan and avoiding dismissal or conversion for 881 days. The success rates of individual chapter 11 cases are higher when they involve joint filings or significant real property, and lower in no-asset cases and cases in which the debtor is represented by an inexperienced attorney or no attorney at all. The researchers also found that cases are more likely to succeed in jurisdictions that follow a broad, rather than narrow, interpretation of the absolute priority rule exception.