Chapter 11 vs. Chapter 13 Bankruptcy: An Overview
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, more can be discharged under Chapter 13.
- Chapter 11 and Chapter 13 bankruptcies allow for the discharging of debts but have different costs, eligibility, and time to completion.
- Chapter 11 can be done by almost any individual or business, with no specific debt-level limits, nor required income.
- Chapter 13 is reserved for individuals with stable incomes, while also having specific debt limits.
- Chapter 13 includes a trustee appointment that will handle distributing all income to creditors over a three- to five-year time period.
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 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.
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.