Chapter 11 Bankruptcy vs Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a personal reorganization bankruptcy that works well for income-earning individuals. Businesses tend to reorganize under Chapter 11 bankruptcy. Find out if you should file for Chapter 13 bankruptcy or Chapter 11 bankruptcy to get rid of your debt.

By , Attorney · University of the Pacific McGeorge School of Law

Chapters 11 and 13 provide debt reorganization solutions for income-earning people and companies struggling financially. Chapter 11 bankruptcy is used by larger businesses and individuals whose obligations exceed the Chapter 13 bankruptcy debt limits. By contrast, Chapter 13 is often the better choice for individuals and sole proprietors.

After learning about the differences between Chapters 11 and 13, check out the resources provided at the end of the article. You'll find links to bankruptcy forms and additional articles we think you'll enjoy. If you own a business, you'll also want to consider bankruptcy options for struggling small businesses.

What Is Chapter 11 Bankruptcy?

Chapter 11 allows debtors to reorganize their finances while keeping assets. Reorganization can involve negotiating balances on secured debt, lowering payments, wiping out balances, and more.

Who Qualifies to File for Chapter 11 Bankruptcy?

Both businesses and individuals can file for Chapter 11 bankruptcy. Once started, most collection efforts will stop due to the bankruptcy's automatic stay provision. In a traditional Chapter 11 proceeding, a bankruptcy trustee isn't appointed to oversee the case. Instead, the debtor handles most of the duties a trustee would handle in other chapters.

How Does Chapter 11 Bankruptcy Work?

You'll create a plan of reorganization explaining 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 to proceed. If a small business or individual case qualifies under the streamlined Subdivision V approach, your case will be appointed a trustee and move more like a Chapter 13 matter.

Learn more about the Chapter 11 plan of reorganization.

Are Debts Discharged in Chapter 11 Bankruptcy?

In a business filing, your dischargeable debt (debt that you are no longer responsible for) will be erased (discharged) once the court confirms your plan. However, you must still comply with any terms set forth by the plan itself. The discharge wipes out all debt that predates the filing immediately upon confirmation in a business filing.

An individual filing for Chapter 11 won't get the discharge until after making all plan payments. Also, an individual cannot wipe out some types of debt, such as domestic support obligations, some taxes, and liabilities incurred through fraud.

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. Many Chapter 13 debtors repay only a small portion of their unsecured debt through the plan, but even so, most plan payments are hefty. The amount of your plan payment will largely depend on your income and the value of your assets.

Once filed, the automatic stay will stop any collection efforts against the filer. Also, a trustee will be appointed to oversee your case. Upon successful plan completion, dischargeable debts are erased.

Qualifying for Chapter 13 Bankruptcy

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.

To file for Chapter 13, your unsecured debts must be less than the current Chapter 13 debt limits. The current Chapter 13 debt limits are on the U.S. Courts Chapter 13 Bankruptcy Basics webpage. Many other eligibility requirements for Chapter 13 exist, as well. Particularly, you'll need to earn enough to pay all amounts required by the Chapter 13 plan.

Why Should I Choose Chapter 11 Over Chapter 13?

Chapter 11 typically makes sense for businesses or individuals whose debt levels exceed those allowed in Chapter 13 bankruptcy. Some small business owners and individuals can take advantage of streamlined Chapter 11 procedures found under Subdivision V. Subdivision V is less complicated and, in most cases, costs far less than a traditional Chapter 11 case.

Why Should I Choose Chapter 13 Over Chapter 11?

Some of the advantages of filing for Chapter 13 bankruptcy over Chapter 11 include the following:

Unlike Chapter 11 Bankruptcy, Chapter 13 Protects Codebtors

Chapter 13's automatic stay protection extends to codebtors. So, if you and another person are 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.

Get details on the codebtor stay in Chapter 13.

Chapter 13 Is Cheaper Than Chapter 11 Bankruptcy

Chapter 13 is usually less expensive than Chapter 11. This is because:

  • the filing fee for Chapter 13 is less costly, and
  • the Chapter 13 process requires less work.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

Downloadable Copies of Bankruptcy Forms

Chapters 7 and 13 Bankruptcy Forms

Chapter 7 Bankruptcy Document Checklist

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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