Should I File for Chapter 11 or Chapter 13 Bankruptcy?

Chapter 13 bankruptcy usually makes more sense for individuals and small businesses.

Chapter 11 and Chapter 13 bankruptcy provide ways 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. A business cannot file for Chapter 13 bankruptcy.

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 traditional Chapter 11 proceeding, a bankruptcy trustee isn't 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 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 for it to go forward. If a small business case or individual case qualifies under the streamlined Subdivision V approach, your case will be appointed a trustee, and it will proceed more like a Chapter 13 matter.

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 (discharged) once the court confirms your plan. However, you must still comply with any terms set forth by the plan itself. In a business filing, the discharge wipes out all debt that predates the filing immediately upon confirmation.

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

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.

To file for Chapter 13, your unsecured debts must be less than $419,275, and your secured debts less than $1,257,850 (as of 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. Once filed, the automatic stay will stop any collection efforts against the filer. Also, a trustee will be appointed to oversee your case.

Read about other eligibility requirements for Chapter 13.

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 and individuals can take advantage of streamlined Chapter 11 procedures found under Subdivision V.

To learn more, see Nolo’s article Chapter 11 Bankruptcy for Small Business Owners or When Is Chapter 11 Bankruptcy a Good Option for Your Small Business?

Why Should I Choose Chapter 13 Over Chapter 11?

If you qualify to file for Chapter 13 bankruptcy, and you find that it will meet your needs, 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:

Codebtor Stay in Chapter 13, But Not in Chapter 11

The protection of the automatic stay in a Chapter 13 bankruptcy extends to codebtors. So 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.

Get details on the codebtor stay in Chapter 13.

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 specific criteria to qualify. To learn more, see 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, and
  • the Chapter 13 process requires less work.

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