Chapter 11 vs. Chapter 13 Bankruptcy: What’s the Difference?

If you’re a small business owner with a lot of debt, the two main options that may help you keep your business or personal finances afloat are Chapter 11 and Chapter 13 bankruptcy. However, it’s important to understand the differences between Chapter 11 vs. Chapter 13 to ensure you file for the right type of bankruptcy.

Both types of bankruptcy filings will allow you to reorganize and possibly discharge some of your debts but the two filing options have different timelines, eligibility criteria, and costs. Chapter 11 can be used by businesses and individuals, but Chapter 13 can only be used by individuals.

Differences Between Chapter 11 vs Chapter 13 Bankruptcy

Although both bankruptcies allow you to restructure your finances, there are some notable differences between Chapter 11 vs. Chapter 13 bankruptcy. Here’s a list of the key differences between the two bankruptcy options:

• There are no debt limits in Chapter 11, but there’s a cap you can have, in order to file under Chapter 13 bankruptcy.
• There’s more freedom with Chapter 11 since there’s no bankruptcy trustee appointed for the case. The filer will be the “debtor in possession” of his or her own assets.
• Debtors need to submit a Chapter 13 plan within 14 days of filing the petition. With Chapter 11, there’s no mandatory deadline to file the payment plan.
• Debtors can’t incur new debt without the consent of the trustee under Chapter 13. Under Chapter 11, they can– within limits, of course.
• Under Chapter 11, creditors can reject the repayment plan you propose. In most Chapter 13 cases, creditors accept the plan, as it is originally proposed.

What Is Chapter 11 Bankruptcy?

Chapter 11 is a reorganization bankruptcy that is typically used by small businesses. With this type of bankruptcy, companies can draft a repayment plan to pay off their debts while keeping the business active.

While there is no mandatory timeline for submitting the repayment plan, in most cases, filers submit them in three to four months. Creditors need to approve the repayment plan before you can start making your revised monthly payments.

Pros 

• You can continue to operate your business while you repay your debts.
• Bankruptcy protection will provide you with a break from collection calls and letters.
• You may be able to renegotiate contracts and leases as a part of your repayment plan.
• You’ll be able to get some initial relief from your situation, with the discharge of some debts and contracts.  

Cons

• Chapter 11 bankruptcy process can be lengthy and complex, with some cases taking up to five years.
• The reorganization plan is only approved when a majority of creditors accept it.
• Your personal assets may not always be protected, especially if the business is closely-held by a small family or group of owner-investors.
• The filing fees and attorney fees can be quite high, especially for complex cases.

What Is Chapter 13 Bankruptcy?

Chapter 13 is also a form of reorganization bankruptcy for individuals, which is also known as the “wage earner’s bankruptcy”. Under Chapter 13, you’ll be required to make a monthly payment to a trustee for three to five years. The aim of this process is to provide you with extended time to pay past-due debts you owe on secured loans, and get most of your remaining debts discharged upon completion of the payment plan.

To be eligible for Chapter 13, you must not have filed for Chapter 13 in the last two years or Chapter 7 bankruptcy in the last four years, and your combined total secured and unsecured debts should also not exceed $2,750,000.

Pros 

• You’ll have more time to repay your creditors.
• The automatic stay will stop all collection efforts from lenders.
• You’ll be allowed to retain your personal and business assets as long as you make regular payments.
• In some cases, the court may reduce or discharge the remaining amount of debt you owe if you fulfill the terms of your payment plan.

Cons

• You’ll need to make payments for three to five years, which requires a long-term commitment, and the consistent income to support your payments along the way.
• You’ll still owe certain debts after discharge, such as spousal support, student loans, and child support.
• Chapter 13 bankruptcy will be on your credit report for seven years.

When To File for Chapter 11

When deciding between Chapter 11 vs. Chapter 13, it’s important to understand what type of circumstances call for each type of bankruptcy. The main reason to file for Chapter 11 bankruptcy is if your business is failing. If you have personal guarantees on your business debts, filing for Chapter 11 bankruptcy may protect you.

Another reason why you may file Chapter 11 is if your business is profitable, but it has too much debt. Filing for Chapter 11 bankruptcy may relieve your stress by allowing you to keep your business operational while you restructure your business and find a better way to repay your debts.  

When To File for Chapter 13

If you are an individual or a sole proprietor with many secured and unsecured debts, you can file for Chapter 13 bankruptcy to avoid liquidating your assets. Many debtors use this option to avoid foreclosure on their homes.

When choosing between Chapter 7 vs. Chapter 13, it makes more financial sense to opt for Chapter 13 when you have a regular income because it allows you to retain some of your assets, depending on exemptions. Chapter 7 is a liquidation bankruptcy where your assets are sold to repay creditors, but it is usually harder to qualify for due to the means test.

Which One Is Right for You?

When deciding between Chapter 11 vs. Chapter 13 bankruptcy, consider whether you are filing as an individual or a business, your disposable income, and the qualification requirements for each. If your debts are higher than the allowable debt limits in Chapter 13, you may have to file for Chapter 11.

Brad Reichert, debt expert and founder and managing director of Reichert Asset Management LLC, shares some advice about bankruptcy. “While approximately 96% of Chapter 7 bankruptcies are successful, only about 40% of Chapter 13 cases and about one in six Chapter 11 repayment plans are successfully completed as originally approved by the courts and fully discharged when the last payment is made,” says Reichert.

Reichert adds that “as a result, it is important to be sure that you have the resources and ability to make all of your court-approved plan’s payments, on time, for the entire duration of that time. If not, it means you will have to wait before you may file for Chapter 11 or 13 again,” he shares. Reichert explains that consumers may want to look at Chapter 7 or some other method of debt relief before pursuing these bankruptcy options. 

Bankruptcy cases are complex, so it’s best to speak to a bankruptcy lawyer, to discuss your personal circumstances and determine the right option. Your bankruptcy attorney will also advise you if another form of bankruptcy may better solve your financial problems.