Chapter 11 vs. Chapter 13 Bankruptcy

Chapter 11 or Chapter 13 bankruptcy: an overview

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

With certain limitations, both bankruptcies allow filers to change their payment terms on secured debts, give time to sell assets, and eliminate obligations that the filer cannot pay during the life of the plan. Although both allow for the discharge of debts, more debts can be discharged under Chapter 13.

Key points to remember

  • Chapter 11 and 13 bankruptcies allow for the discharge of debts, but have different costs, eligibility, and timeframe.
  • Chapter 11 can be done by almost any individual or business, with no specific debt level limit and no income required.
  • Chapter 13 is reserved for people with stable incomes, while also having specific debt limits.
  • Chapter 13 includes an appointment of a trustee who will handle the distribution of all income to creditors over a period of three to five years.

Chapter 11

Almost anyone can file for Chapter 11 bankruptcy, including individuals, businesses, partnerships, joint ventures, and limited liability companies (LLCs). There is no specified debt level limit and no income required. However, Chapter 11 is the most complex and usually the most expensive form of bankruptcy. Thus, it is most often used by businesses rather than individuals.

Filing for Chapter 11 bankruptcy allows businesses to stay open and continue to operate while reworking their financial obligations. Registrants are able to present a reorganization plan, which may include plans to reduce staff and costs.sese

Many large companies filed for Chapter 11 bankruptcy and later exited to continue operating, including General Motors and Chrysler, both of which filed for bankruptcy in 2009. With the advent of the COVID-19 pandemic, a veritable avalanche of bankruptcies occurs, including leading companies such as J. Crew and JC Penney.sese sese sese

Chapter 13

Chapter 13 bankruptcy can only be filed by people with stable income. Debt limitations are also part of Chapter 13 eligibility, and the limits change regularly. In April 2019, the limits were approximately $ 419,275 in unsecured debt and $ 1,257,850 in secured debt, these limits being in effect until April 2022.sese seChapter 13 differs from Chapter 7, whereby individuals can use Chapter 7 to fully erase all their debts. Chapter 7 has income limits that vary by state.sese

For Chapter 13, individuals must submit and implement a repayment plan for debts payable within three to five years. The filer can usually keep certain assets, such as a house and a car. It is also an “employee plan”, where individuals pay a monthly amount to a trustee, who in turn pays the individual’s creditors. Repayment to creditors must generally be equal to or greater than what they would receive in other bankruptcy proceedings.sese

Chapter 13 bankruptcy requires the appointment of a trustee, which is optional for Chapter 11 bankruptcy.

Why submit a dossier for Chapter 11?

The main reason for filing for Chapter 11 bankruptcy is to be able to prevent a business from going out of business. Of course, the business must be in such a position that restructuring its debt makes financial sense. By staying in business while reorganizing the debt, the company has a chance of solvency. The disadvantages are its cost and complexity. Small businesses often lacked the resources to use it.

That’s why the Small Business Reorganization Act of 2019, which came into effect on February 19, 2020, added a new subchapter 5 to Chapter 11 designed to make it easier for small businesses to go bankrupt. The law defines them “as entities with less than about $ 2.7 million in debt that also meet other criteria,” according to the US Department of Justice, and it “imposes shorter deadlines for completing the bankruptcy process, allows greater flexibility in negotiating restructuring plans. with creditors, and provides for a private trustee who will work with the small business debtor and its creditors to facilitate the development of a consensual reorganization plan.sese

Reasons to apply for Chapter 13

The main reason a person files for Chapter 13 bankruptcy is to prevent the liquidation of all of their assets. In particular, it is frequently used to prevent the forced sale of an individual’s house, which Chapter 7 cannot do. Chapter 11 can also prevent a forced home sale, but is usually too expensive and complicated for most people. Of course, not everyone has a choice to use Chapter 13. Having a stable income is a crucial qualifier, and there’s that $ 2.7 million debt limit as well.

Chapter 11 vs. Chapter 13

Chapter 13 involves the appointment of a trustee; with chapter 11 this is optional and is usually not done. The role of the trustee includes reviewing the bankruptcy proposal, making recommendations to the court, and collecting and distributing payments from creditors.

If a debtor meets all of the conditions, there is no limit to the duration of a Chapter 11 plan, although typical plans are structured for three to five years. The court may extend the timeframe of the plan for debtors who need more time to make the required payments.

The approval process for a Chapter 13 bankruptcy is usually much faster. There is, however, a fixed commitment period of three to five years, during which a debtor must cede almost all of his disposable income to the designated trustee for distribution among the creditors. The commitment period may be shortened but never extended (except in the following special circumstance).

Changes due to the COVID-19 pandemic

The CARES (Coronavirus Aid, Relief, and Economic Security) law, promulgated by the President on March 27, 2020, made a number of changes to bankruptcy laws to make the process more accessible to businesses and economically disadvantaged people by the pandemic. . These include increasing the Chapter 11 Subchapter 5 debt limit to $ 7,500,000, excluding federal emergency relief payments due to COVID-19 from “current monthly income” in Chapter 7 and Chapter 13 and “disposable income” in Chapter 13, and allowing Chapter 13 repayment plans to be extended to seven years. The changes apply to bankruptcies filed after the passage of the CARES Act and end one year later.sese

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