Kelly Moore: Chapter 11 vs Chapter 13 Bankruptcy

There are some notable differences between Chapter 11 and Chapter 13 bankruptcy, including eligibility, cost, and the amount of time required to complete the process. Both bankruptcies give debtors the opportunity to stay in business and to restructure their finances.

Barring some limitations, both bankruptcies allow filers to modify their payment terms on secured debts, provide time to sell assets, and eliminate obligations the filer cannot pay over the plan’s term. While both allow the discharging of debts.

Chapter 11 Bankruptcy

Nearly everyone can file for Chapter 11 bankruptcy, including individuals, businesses, partnerships, joint ventures, and limited liability companies (LLCs). There is no specified debt-level limit, nor required income. However, Chapter 11 is the most complex form of bankruptcy and generally the most expensive. Thus, it’s most often used by businesses and not individuals, where companies can use Chapter 11 bankruptcy to restructure their debts and continue operating.

Filing Chapter 11 bankruptcy allows businesses to stay open and continue operating while reworking their financial obligations. Filers are able to put forth a reorganization plan, which can include downsizing and expense reduction plans. Many large businesses have filed Chapter 11 bankruptcy and came out of bankruptcy later to continue operating, including General Motors and Chrysler, which both filed for bankruptcy in 2009.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy can only be filed by individuals with a stable income. Debt limitations are also part of Chapter 13 eligibility, and the limits change regularly. As of 2019, limits are approximately $419,275 in unsecured debt and $1,257,850 in secured debt. Chapter 13 differs from Chapter 7, where individuals can use Chapter 7 to wipe out all their debt entirely. Chapter 7 does have income limits that vary by state.
For Chapter 13, individuals must submit and implement a repayment plan for debts to be paid within three to five years. The filer can generally keep some assets, such as a home. It’s also called a “wage earner’s plan,” where individuals pay a monthly amount to a trustee, who in turn pays the individual’s creditors. The payback to creditors is usually required to be equivalent or better than what they’d receive under other bankruptcy proceedings.

Key Differences

Chapter 13 involves the appointment of a trustee, while with Chapter 11, this is optional and not usually done. The trustee’s role includes reviewing the bankruptcy proposal, making recommendations to the court, and the collection and distribution of creditor payments.

Chapter 11 bankruptcy often has complex and expensive proceedings. There are provisions, however, that help to streamline cases involving small business owners. If a debtor meets all the requirements, there’s no limit to a Chapter 11 plan’s duration, though typical plans are structured for three to five years. The court can extend the time frame of the plan for debtors who need more time to make the required payments.

The approval process for a Chapter 13 bankruptcy is generally much more expedient. There’s a set commitment period, however, of three to five years, during which a debtor must relinquish essentially all disposable income to the appointed trustee for distribution among creditors. The commitment period can be shortened, but never extended.

Both Chapter 11 and Chapter 13 bankruptcy provide a way for people struggling with debt to keep their property while reorganizing their debt. Chapter 11 bankruptcy works well for businesses and individuals whose debt exceeds the Chapter 13 bankruptcy limits. In most cases, Chapter 13 is the better choice for qualifying individuals (and sole proprietors).

Choosing the Right Type of Bankruptcy

In many cases, the type of bankruptcy filed will be contingent on two things: Your income and your assets. Your income is important because it may preclude you from filing a simple Chapter 7 case, and your assets are important because if you have nonexempt property, you might lose it in Chapter 7, but can protect it in Chapter 13.

Here are a few scenarios that explore which bankruptcy strategy would be best:

Unemployed Debtors with Few Assets – Chapter 7

Loss of income combined with a large amount of debt is the number one reason people file for bankruptcy. Compounding factors like divorce, medical emergencies, or the death of a family member are also common. Assume that in this scenario the debtor has no income other than unemployment benefits, does not own a home, and has one car with a loan against it.

In cases like this, a Chapter 7 bankruptcy is the fastest, easiest, and most effective means of getting rid of debt. As a matter of fact, this is the most common bankruptcy case, often called a “no asset” bankruptcy.

Unemployed Homeowners – Upside-Down Mortgage – Chapter 7 or Chapter 13

Homeowners who are experiencing a loss of income also have options under bankruptcy law. For those homeowners whose property value has fallen below the value of the loan against it, Chapter 7 is probably still the best option. Since the value of the home is less than the value of the lien against it, the homeowner has no equity in the bankruptcy estate, so the house is protected from liquidation. A Chapter 7 bankruptcy can quickly relieve them of their obligations to repay unsecured debts, making monthly bills much more manageable.

Unemployed Homeowners – Significant Equity – Chapter 7 or 13

If a homeowner has a significant amount of equity in property, then Chapter 7 may or may not be the best option. If the homeowner’s state exempts a generous amount of home equity, then the home may be safe. But if the state homestead exemption doesn’t cover the equity, the homeowner may lose the home in a Chapter 7 bankruptcy. The homeowner can keep the home in Chapter 13 bankruptcy if he or she keeps current on the mortgage. Keep in mind though, there must be enough income available from the petitioning household to fund a repayment plan.

Employed Homeowners Facing Mortgage Delinquency or Foreclosure – Chapter 13

For homeowners who have fallen behind on mortgage payments, Chapter 13 offers a way to catch up or “cure” past due mortgage payments while simultaneously eliminating some portion of dischargeable debt. This means they can save the home from foreclosure and get rid of a lot of credit card debt, medical debt, and possibly even second and third mortgages or HELOCs. Chapter 7 bankruptcy does not provide a way for homeowners to make up mortgage arrears.

Wealthy Petitioners with a Large Amount of Debt – Chapter 11

Very wealthy debtors often need to file under Chapter 11 due to the debt and income limits of Chapter 7 and Chapter 13 bankruptcies.

What Is Chapter 11 Bankruptcy?

Chapter 11 allows debtors to reorganize their finances–including reducing payments–while keeping assets. Both businesses and individuals can file for Chapter 11 bankruptcy. Once started, most collection efforts will stop as a result of bankruptcy’s automatic stay provision. In a Chapter 11 proceeding, a bankruptcy trustee is not appointed to oversee the case. Instead, the debtor handles most duties handled by a trustee in other chapters.

You’ll create a plan of reorganization which explains how you will repay your debt. Unless your case qualifies as a small business case, the plan must be voted on by your creditors and confirmed by the court in order for it to go forward. (Learn more about the Chapter 11 plan of reorganization.) In a business filing, your dischargeable debt (debt that you are no longer responsible for) will be erased once the court confirms your plan. However, you must still act in accordance with any terms set forth by the plan itself. An individual filing for Chapter 11 won’t get the discharge until you have made all payments under the plan. (Learn more about how Chapter 11 bankruptcy works.)

What Is Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy you keep your property in exchange for paying creditors your disposable income through a three- to five-year repayment plan. Dischargeable debts get erased upon successful plan completion. Many Chapter 13 debtors end up repaying only a small portion of their unsecured debt through the plan, however, it isn’t always the case. The amount of your plan payment will largely depend on your income and the value of your assets. (Learn more about how Chapter 13 bankruptcy works.)

In order to file for Chapter 13, your unsecured debts must be less than $419,275 and your secured debt less than $1,257850 (as of April 1, 2019; $394,725 and $1,184,200 for cases filed after April 2016 but before April 2019). Only individuals (or sole proprietors) can file for Chapter 13 bankruptcy. Corporations and limited liability companies are not eligible because they are considered separate legal entities. (Read about other eligibility requirements for Chapter 13.)

Once filed, the automatic stay will stop any collection efforts against. Also, a trustee will be appointed to oversee your case. If you are a small business debtor, you can continue to run your business, but you must provide periodic financial and operations reports to the trustee.

Eligibility for Chapter 11 or Chapter 13 Bankruptcy

Virtually anyone can file for Chapter 11 bankruptcy, whereas many small businesses are ineligible to file for Chapter 13.

• Chapter 13 eligibility. Chapter 13 is available to individuals with regular income. If you operate your business as a sole proprietorship, you can take advantage of Chapter 13 by filing a petition in your name. Your business debts will be included in your plan. Small companies formed as corporations, partnerships or other entities aren’t eligible for Chapter 13 relief. However, that’s not to say that someone who owns a business can’t file an individual Chapter 13–sometimes it helps. Chapter 13 is also subject to debt limitations, which change periodically. As of April 2019, a filer’s debt can’t exceed $1,257,850 in secured debt and $419,275 in unsecured debt. Learn more about eligibility for Chapter 13 bankruptcy by calling Ascent Law LLC today.

• Chapter 11 eligibility. Almost anyone can file bankruptcy under Chapter 11. Individuals, corporations, partnerships, joint ventures, and limited liability companies are all eligible to be Chapter 11 debtors. There are no debt or income requirements or limitations for filing bankruptcy under Chapter 11.

Why Should I Choose Chapter 11 Over Chapter 13?

Chapter 11 typically makes sense for businesses or individuals who have debt levels that are greater than those allowed in Chapter 13 bankruptcy. Some small business owners can take advantage of streamlined Chapter 11 procedures. To learn more see Nolo’s article Chapter 11 Bankruptcy for Small Business Owners.

Why Should I Choose Chapter 13 Over Chapter 11?

If you qualify to file for Chapter 13 bankruptcy, you’ll likely want to file it rather than a Chapter 11 bankruptcy. Some of the advantages of a Chapter 13 bankruptcy over Chapter 11 include:
Co-Debtor Stay in Chapter 13, But Not in Chapter 11
The protection of the automatic stay in a Chapter 13 bankruptcy extends to codebtors. This means that if you and another person are both liable for an account, loan, or other debt, creditors cannot pursue your codebtor for payment during your bankruptcy case. While collection can resume once your Chapter 13 case is over, this will at least give codebtors a reprieve from collection actions for three to five years. Chapter 11 does not provide the same protection to codebtors.

More Debts Are Wiped Out in Chapter 13

You can wipe out additional debts in Chapter 13 than in Chapter 11 which may mean you will ultimately have less debt to repay. For instance, some of the debts you can discharge in a Chapter 13 bankruptcy (but not in a Chapter 11 bankruptcy) include certain marital debts from divorce or settlement agreements and condominium, cooperative and homeowners association fees incurred after the bankruptcy filing date depending on your jurisdiction.

Hardship Discharge Available in Chapter 13

If circumstances prevent you from complying with your plan, you can request a hardship discharge. If granted, you’ll get a discharge without having to complete your plan (not all types of debts will be wiped out, however). You must meet certain criteria in order to qualify. To learn more, call us about a chapter 13 Hardship Discharge.

A hardship discharge is not available in Chapter 11 bankruptcy. If you cannot complete the terms of your reorganization plan your Chapter 11 case will either be dismissed or converted to a Chapter 7 bankruptcy.

Chapter 13 Is Cheaper Than Chapter 11

Chapter 13 is usually less expensive than Chapter 11. This is because:
• the filing fee for Chapter 13 is less costly
• the Chapter 13 process requires less work, and
• the maximum Chapter 13 plan is five years, as opposed to a lengthier Chapter 11 plan.

Free Consultation with Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. From Chapter 7, 11, 12 to chapter 13, we want to help you. Come in or call in for your free initial consultation.