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

Chapter 11 and Chapter 13 differ with respect to eligibility, costs, and duration of proceedings. Neither bankruptcy prevents a debtor from staying in business or reorganizing its finances.

Both bankruptcy procedures give claimants the opportunity to modify payment terms on their secured debts, buy time to sell assets, and free themselves from obligations they cannot meet during the life of the plan. It is true that both procedures allow for the discharge of debts, but more debts can be discharged under Chapter 13.

Chapter 11

Individuals, corporations, partnerships, joint ventures, and limited liability companies (LLCs) can all file for bankruptcy under Chapter 11. The amount of debt and income requirements are not specified. Chapter 11 bankruptcy, on the other hand, is the most complex and expensive. Businesses are more likely to file for Chapter 11 bankruptcy than individuals.

Businesses filing for Chapter 11 bankruptcy can continue to operate while they revise their financial obligations. Filers may propose a plan of reorganization that includes downsizing and cost-cutting.

General Motors and Chrysler, both of which filed for bankruptcy in 2009, are two examples of large companies that have filed for bankruptcy and then resurfaced to continue operations. In the wake of the COVID -19 pandemic, an avalanche of bankruptcies occurs, including companies such as J Crew and JC Penney.

Chapter 13

Chapter 13 bankruptcy can only be filed by individuals who have a stable income. In addition to debt limits, Chapter 13 eligibility is subject to periodic changes in debt limits. The current limit for unsecured debt is $419,275 and for secured debt is $1,257,850. These limits are in effect until April 2022. Chapter 13 is different from Chapter 7, where individuals in a Chapter 7 case can discharge all of their debts. For Chapter 7, there are state-specific income limits.

Individuals filing for Chapter 13 must submit and implement a plan to repay their debts within three to five years. Generally, the applicant can keep some assets, such as their home and car. 

The applicant pays a monthly amount to a trustee, who then pays his or her creditors. This is also called a “wage earner plan.” Creditors generally must receive a repayment at least equal to what they would receive in a regular bankruptcy proceeding.

Payments are based on your disposable income, all money you have coming in from all sources minus absolutely necessary living expenses. At the end of the payment period, as long as you have made all of your monthly payments, any unsecured debts (like credit card debt) that remain will be fully discharged. The filing fee for chapter 13 is $310, and attorney fees average around $2,000.

A chapter 13 bankruptcy works more like a financial fix-up that includes a three-to-five-year repayment plan. Unlike chapter 7, most debts don’t get canceled under chapter 13, but that can be beneficial for someone who might lose their car or other assets under chapter 7.

You don’t turn over your property to a trustee here; rather, you develop and stick with an extended debt payment plan. Along with property, this version also protects cosigners. Working through a chapter 13 bankruptcy isn’t easy, but it can help you develop stronger money management skills. 

Why file for Chapter 11?

The primary reason for filing for Chapter 11 bankruptcy is to avoid closing a business permanently. Debt restructuring is only possible if the company is financially sound. As long as the company remains in business, it has a good chance of becoming solvent. The downside is the cost and complexity. Many small businesses cannot afford it.

To help small businesses, the Small Business Reorganization Act of 2019 added a new Subchapter V to Chapter 11 on February 19, 2020. According to the U.S. Department of Justice, they are defined as small businesses with debt of less than $2.7 million.

They will be subject to shorter deadlines for completing the bankruptcy process, more flexibility in negotiating reorganization plans with creditors, and the appointment of a private trustee to work with small business debtors and their creditors to develop a mutually agreeable plan of reorganization.

Reasons for filing for Chapter 13

To prevent their assets from being liquidated, individuals file for Chapter 13 bankruptcy. Chapter 13 bankruptcy can often be used to prevent home foreclosure, which is not possible with Chapter 7 bankruptcy. Although Chapter 11 can prevent foreclosure, it is too expensive and too complicated for most people to use. Chapter 13, of course, is not an option for everyone. There is also a $2.7 million debt limit, so a stable income is a must.

Chapter 11 vs. Chapter 13

Under Chapter 13, a trustee is appointed; under Chapter 11, this is optional and usually not done. Trustees review bankruptcy petitions, make recommendations to the court and collect and distribute payments to creditors.

There is no limit to the duration of a Chapter 11 plan if the debtor meets all the requirements, although most plans run between three and five years. If the debtor needs more time to make the required payments, the court can extend the repayment plan.

Generally, the approval process for a Chapter 13 bankruptcy case is much faster. However, during the three- to five-year commitment period, the debtor must turn over substantially all of his or her disposable income to the appointed trustee for distribution to creditors. The obligation period may be shortened, but not extended (except under the following special circumstances).

Changes due to the pandemic COVID -19

With the signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, President Trump has made a number of changes to bankruptcy law aimed at making it easier for businesses and individuals who are economically disadvantaged by the pandemic. 

Under these changes, the Chapter 11 Subchapter V debt limit is raised to $7,500,000, federal emergency payments due to COVID -19 are excluded from “current monthly income” in Chapter 7 and Chapter 13 and from “disposable income” in Chapter 13, and the Chapter 13 repayment plan is extended to seven years. These changes apply to bankruptcies filed after the passage of the CARES Act and expire one year later.

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