Chapter 11 vs. Chapter 13 Bankruptcy - What is the Difference and Which is Best to File?

You are thinking about filing bankruptcy but don't know the difference between a chapter 11 and chapter 13.
Information in this article does not constitute legal advice, it is for informational purposes only, and may not constitute the most up-to-date information. Readers should contact their attorney for advice on any particular legal matter.

The common types of bankruptcy are Chapter 7 and Chapter 13. However, there is also Chapter 11 bankruptcy. All chapters of bankruptcy serve the same purpose, debt relief. However, the different types of bankruptcy are better suited for different people. Here is a detailed comparison between Chapter 11 and 13 bankruptcy

Chapter 11 Bankruptcy Case

It is a type of bankruptcy that helps debtors get rid of debt by reorganizing their debts with the supervision of the United States Trustee's Office. Unlike Chapter 13, in Chapter 11, the courts do not appoint a trustee to oversee the case. So, the debtor handles the duties the trustee would otherwise handle. They become the debtor-in-possession, i.e., the debtor gets to keep their assets and operate their business.

Chapter 11 Plan

In Chapter 11, the debtor will propose a detailed debt reorganization plan, known as the Plan of Reorganization. A Plan of Reorganization provides the debtor's lenders with details on how they intend to reorganize their debt. It could include surrounding some assets, lowering payments by renegotiating contracts or proposing lower debts based on the asset's value acting as security. 

 The plan should be filed within 120 days of filing Chapter 11 bankruptcy unless the court extends the deadline. Failure to file within 120 days might lead to the creditors filing their proposed plan.

If the debtor submits the plan on time, the creditors will be asked to vote on the plan. They can vote to approve or disapprove of the plan. In Chapter 11, there are four main classes of creditors

The 4 Chapter 11 classes of creditors:

  • Secured Creditors – the creditor has a lien on an asset(s)
  • Priority Unsecured Creditors – a debt where the lender has no collateral over the debt but will be prioritized before unsecured creditors
  • General Unsecured Creditors – these are lenders with no collateral and no priority
  • Equity Security Holders – these are creditors who hold equity in the debtor company, e.g., shareholders

Creditors who are not favored by the proposed plan, i.e., those who will not be fully repaid, can vote either in favor or against it. However, from the four classes of creditors, at least one class should approve the plan before the court confirms the plan. For the court to confirm the plan, the plan should be:

  • Fair and equitable
  • Feasible, that is, can succeed
  • Proposed by the debtor in good faith
  • In the interest of the creditors- the creditors should receive the same amount or more as they would if the debtor filed Chapter 7

If the court confirms the plan, the company will not be liable for the dischargeable debt. Filing Chapter 11 will not grant individuals a discharge until they complete their plan, which is considered a legally binding contract between them and their creditors.

What are the Requirements of the Chapter 11 Plan? 

There are two main differences when filing bankruptcy as an invidious under Chapter 11 and 13. In Chapter 11, you open and use new bank accounts, called debtor-in-possession, rather than opening personal bank accounts. You will also have to close and maintain all books and records as you begin a new set of records. 

On the other hand, in Chapter 13, the court will appoint a trustee to your case, who will handle the finances. Your role will be to make payments to the trustee, who will then forward the payments to your creditors

In Chapter 11, you will need to provide financial and business records and a certificate of insurance for your insurable assets. These should be provided to the United States Trustee's Office before the Initial Debtor Interview. 

As the debtor-in-possession, you will need to file monthly operating reports for payments, receipts, and property dispositions. You are also required to pay quarterly fees to the USTO based on your disbursements in the quarter. For a business, you should seek approval from employee professionals, e.g., attorneys, accountants, tax professionals, etc.

Chapter 11 bankruptcy is clearly more complex and costly compared to Chapter 13. Thus, it is ideal for companies or high-wealth individuals having trouble meeting their financial obligations. Since you need to meet many requirements, it is important to get the help of a Chapter 11 bankruptcy lawyer when filing Chapter 11 bankruptcy.

Chapter 13 Bankruptcy Case

It is a bankruptcy case that debtors can use to reorganize their debts and make monthly payments towards their debts. The requirements of filing a Chapter 13 case are lesser than those of filing a Chapter 11 case, and the costs are also significantly lower.

When you file a Chapter 13 case, the bankruptcy courts appoint a Chapter 13 trustee to oversee your case. The trustee will receive your monthly payments and pay your lenders as stipulated in the repayment plan. If you have a mortgage, you will repay it outside the plan. On completion of the plan, most people only remain with their mortgage payments, which will be easier to keep up with.

What are the Advantages of Chapter 13 over Chapter 11?

There are five main advantages of filing Chapter 13 over Chapter 11 bankruptcy. Chapter 13:

  • Protects co-debtors
  • It is easier to file and involves less paperwork
  • The creditors will not need to vote on your proposed repayment plan, even though they can object to it
  • It does not charge any quarterly fees
  • More affordable to file

However, Chapter 13 is only for individuals. Therefore, business entities cannot file for Chapter 13 bankruptcy. If the above advantages sound appealing to you, use this Chapter 13 calculator to estimate how much your monthly payment will be if you decide to file.

Step-by-Step on How to File Chapter 13 Bankruptcy?

If you would like to file for Chapter 13 bankruptcy, here is a step-by-step guide:

  1. See if you qualify to file
  2. If you discalceate your disposable income. This will help you determine how much you must repay your unsecured lenders
  3. Create a workable and affordable monthly budget that accounts for overdue mortgage payments, overdue domestic support payments, car loans, and administrative fees associated with filing bankruptcy, e.g., attorney fees, priority debts, e.g., unpaid tax debts, and unsecured creditors. Coming up with a repayment plan can be hard, and we recommend seeking the help of a professional Chapter 13 attorney
  4. Download and file the necessary bankruptcy forms. Since you need to file many forms, we recommend hiring a bankruptcy attorney to help fill these forms out correctly and file the case on your behalf.
  5. File your case

Why We Recommend Working with an Attorney

You need to complete many forms accurately when filing for bankruptcy, alongside coming up with a repayment plan. If there are any objections to the plan, you will be responsible for settling the objections, which could be difficult without previous experience.

A bankruptcy lawyer can handle filling these forms, and they can do it more accurately from experience. Additionally, they can help you prepare an actionable repayment schedule for your debt which keeps your monthly payments at the lowest possible. The plan is also more likely to be approved by the court. Your attorney can assess your assets and use bankruptcy exemptions to safeguard and protect your assets. 

Although you can opt to take your chances and file your case without a lawyer, you will need to understand the bankruptcy laws, exemptions, procedures, and court rules. You also risk losing your assets and might end up with a repayment plan with higher monthly payments.

Most debtors avoid hiring a Chapter 13 bankruptcy attorney because they have no means to pay them. However, most bankruptcy lawyers will add attorney fees to the Chapter 13 plan. So their services will be more affordable.

We can help you find a bankruptcy lawyer near you who offers free bankruptcy consultations. Get in touch with us today

How Chapter 13 Can Get You Out of Debt

Being in debt not only means falling behind on your payments. It means mental stress and the risk of losing assets you used as collateral. Filing Chapter 13 bankruptcy can help stop foreclosure and repossessions and protect your assets. It will also help reduce your debt by making affordable monthly payments for three years minimum or five years maximum. 

Chapter 13 bankruptcy can also help you lower your car loans and reduce your unsecured debts, as you will only repay a proportion of the debts before they are discharged on completion of the plan.

Note: Only unsecured non-priority debts, e.g., credit card debt, can be discharged. Priority unsecured debts like domestic support payments must be paid in full.

Filing bankruptcy is a major decision. So, we came up with tools to help you make an informed decision, like a Chapter 13 calculator, a Youtube Video explaining Chapter 13 bankruptcy at length, and articles on Chapter 13 Filing and whether Filing Chapter 13 is worth it. We also offer free case reviews to help debtors make a choice.

Which Bankruptcy Chapter Is Best for Me?

Both Chapters 11 and 13 bankruptcies will help you get rid of debt. But Chapter 11 is best for businesses and individuals whose debts exceed the bankruptcy limits in Chapter 13. On the other hand, Chapter 13 is better for individuals and spouses whose debt limits are within the Chapter 13 bankruptcy limits.

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