Chapter 11 vs Chapter 13 Bankruptcy

Publication Date :

27 Nov, 2018

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Difference Between Chapter 11 and Chapter 13

Any individual or business can file chapter 11 of bankruptcy, which requires time to make the debt manageable to pay, and the court helps the entity restructure its obligations and liabilities. Chapter 13 bankruptcy, in contrast, provides for the adjustment of the debts that can be applied only by individuals with specific and stable income levels where the plan to repay the part or all of the obligations is made without exceeding five years.

Under the Bankruptcy Code, Chapter 11 and Chapter 13 are legal procedures that deal with the debt problems and payment obligations if the company decides to declare bankruptcy. The bankruptcy code is also a helpful tool for individuals who cannot pay off their debts and allows them to start afresh by liquidating the company's assets and paying off their debts or proposing a complete restructuring of the organization.

Difference Between Chapter 11 and Chapter 13

Chapter 11 bankruptcy is suitable for individuals or businesses intending to restructure their debts, In this, the court adjusts liabilities to make them manageable to pay. Conversely, Chapter 13 bankruptcy is for individuals with stable income, mandating a repayment plan within five years while allowing for debt adjustment.

Chapter 11 bankruptcy has no debt limits, whereas Chapter 13 bankruptcy is subject to a debt limit cap.
Chapter 11 bankruptcies are time-consuming and do not have trustees, while Chapter 13 bankruptcies entail a 15-day payment plan deadline and require the involvement of a trustee.

What is Chapter 11 Bankruptcy?

Chapter 11 is most commonly used by small businesses. The chapter allows the company to draft a plan to help keep the business active while paying off its debt. The filing of a petition can be voluntary or involuntary. A debtor usually has a time frame of generally three to four months to develop a reorganization plan.

However, the timeline can be extended up to 18 months if there is a reason behind it. The trustee is the one responsible for all the time frame approvals.

What is Chapter 13 Bankruptcy?

Chapter 13 of the bankruptcy code concerns more about reorganizing the individual’s finance and less about eliminating debt. It also demands the debtor to make a monthly payment to a chapter 13 trustee for 36 months to 60 months that allow them the length of the plan to pay back past due amounts owed on houses, cars, and other loans that have a significant amount of collateral.

Both chapters allow debtors to propose a new restructuring plan and modify their payment terms, which helps the company stay in business.

Chapter 11 vs Chapter 13 Infographics

Let’s see the top 10 differences between Chapter 11 vs. Chapter 13 bankruptcy.

Key Difference

Under Chapter 11, there are no debt limits; however, under chapter 13, there is a debt limit cap.
A chapter 11 debtor can take months to file a plan and make payments. However, a chapter 13 debtor must surrender a payment plan within 15 days of filing the petition.
Under Chapter 11, the debtor has more freedom as no trustee is appointed than Chapter 13.
Under Chapter 13, the petitioner can retain their property without paying the unsecured creditors. However, Chapter 11 allows the creditor to object when fully repaid.
Under chapter 13, a debtor can restructure many properties by only paying the collateral. In chapter 11, debtors may be restricted from cramming down by a particular class of creditors.

Chapter 11 vs Chapter 13 Comparative Table

Basis	Chapter 11	Chapter 13
Eligibility	To file a petition under Chapter 11, the debtor must be a corporate, partnership, limited liability partnership, or individual.	Under chapter 13, to qualify as a debtor, they must be an individual or a husband and wife to file jointly; any other party needs to file under chapter 11 of the bankruptcy code.
Eligibility	When filing for chapter 11, one will be considered a small business debtor, and the debt must not exceed $2,490,925.	You are eligible to file for Chapter 13 as long as you have not filed for chapter 7 for the past four years or Chapter 13 for the past two years.
Process Cost	This chapter is more expensive than Chapter 13.	This chapter is generally less expensive than Chapter 11.
Process Time	The process of this chapter is comprehensive.	The method of this chapter is short.
Financing	Under Chapter 11, a debtor may incur unsecured debt in the ordinary course of business without the court’s approval.	Under Chapter 13, a debtor cannot incur any new debt without the consent of the court or the trustee.
Payment Plans	Chapter 11 allows no restriction or a mandatory deadline to file a plan under this chapter. However, payments do not begin until the court has approved and confirmed the financial proposal.	Under Chapter 13, one must file a financial plan within 14 days of filling out the petition. The payment plan typically starts after 30 days of filing the plan.
Asset Surrender	In Chapter 11, you need to create a plan to repay your debt. Unless there is a small business case, the creditors should vote, and the court should confirm.	In Chapter 13, the business needs to keep the property or the assets in exchange for paying the creditors through disposable income.
Complexity	It is more complex than Chapter 13 and Chapter 11 bankruptcy that can be helpful for someone who does not qualify for Chapter 13.	It is a much more straightforward and time-saving process than Chapter 11.
Disposable Income	There is no such requirement under this chapter.	In Chapter 13, debtors must use all their disposable earnings to repay the creditors.
Creditors	Creditors can reject a proposed repayment plan.	Under chapter 13, the creditors generally need to accept the repayment plan.

The bankruptcy code is useful for businesses. However, it is intended primarily for the reorganization of firms with heavy debt burdens. Declaring bankruptcy helps companies resolve their financial difficulties and helps rebuild their credit.