Chapter 11 and Chapter 13 are bankruptcy options. Chapter 11 is a reorganization for businesses, while Chapter 13 allows a consumer to completely eliminate debts through repayment under a court-ordered plan.
If you are a business owner, you may wonder which is the right option for you. Both have notable differences, especially when it comes to the cost, how long you have to complete them, and how they impact your existing debts.
Both of these bankruptcy options allow you to repay your debts and renegotiate the terms so that it is easier to pay down those debts. However, you will need to sell some assets, and you must also eliminate any debts that you cannot reasonably pay within the timeframe set by the court. Both technically discharge debts, but you are able to get rid of more business debt under Chapter 13 than you could with Chapter 11.
Understanding the Key Differences
Before you decide which bankruptcy is right for you, you should explore how Chapter 11 and Chapter 13 work.
Under Chapter 11, a business or individual can use it. Even partnerships, LLCs, and sole proprietors can file under Chapter 11.
Even better, there is no debt level limit or income limitation when you file for Chapter 11. Chapter 11 is, however, the more complicated between the two. It is also one of the most expensive to use. Therefore, businesses are more likely to use this form than an individual due to the sheer cost of going through the process.
Some key advantages to Chapter 11 include:
- You Don’t Shut Down Your Business – You can keep your business open and operate as you normally would. You still remain in charge of your company as well.
- You Create the Reorganization Plan – With the help of your bankruptcy attorney, you will come up with a reorganization plan for your debts and your business overall. This plan is more than just outlining how you will repay your debts and the amount per month you will pay. Instead, you must reorganize everything in your business, including how you will reduce expenses.
- Big Businesses Have Made It Through – The best part of Chapter 11 bankruptcy is that some of the largest companies in the U.S. have gone through it and they are still operating today – such as General Motors. So, filing Chapter 11 is not a death sentence for your business. In fact, it could help you continue to boom.
- No Debt Limits – Some types of bankruptcy only let you file if you have a specific threshold of debts, but Chapter 11 does not. Therefore, anyone can use this form of bankruptcy.
Some key disadvantages to Chapter 11 include:
- You Stay Open, But You Will Downsize – No company makes it through Chapter 11 without a few layoffs. Part of the reorganizing is cutting costs, and one place you will likely have to cut is employee expenses. So, you may have to make the tough decision of picking which employees you will let go.
- You May Have to Relocate – Your business could be in a prime location, but if rental costs are eating away at your ability to pay your debts, you may need to move to a smaller location or a less prime location – which could hurt income in the future.
- Expensive Even for Big Corporations – Filing for Chapter 11 is expensive, especially because you will need to hire other experts such as accountants and economists to help create your plan. Therefore, you will spend a lot before you find yourself free of debt.
With Chapter 13, you must have a stable income and file as an individual. You cannot use Chapter 13 for your business, but you may be able to file it if you are a sole proprietor who files taxes for a business under personal income. In that instance, you should consult with an attorney to see if Chapter 13 is still the best option for you.
Under Chapter 13, you have numerous limitations. And if you exceed them, you will be unable to get relief.
In 2019, the limits were $419,275 in unsecured debt and $1,257,850 in secured debt. For most consumers, this is easily met.
Some advantages to Chapter 13:
- You Create a Repayment Plan: Under Chapter 13, you will repay your debts instead of discharging them. This repayment plan is created with your attorney, presented to the court, and then overseen by a trustee from the court.
- Chapter 13 Is Less Costly and Easier to Get Through: Unlike Chapter 11, when you file for Chapter 13, you will not have a drawn out, expensive process to get through, which means less costs in the long run.
Some disadvantages to Chapter 13:
- The Trustee Makes Decisions: The trustee oversees your assets and makes sure you are following your repayment plan.
- You Must Stick to the Plan: Once the court approves your plan, there is no turning back. You must follow that repayment plan, or your case could be dismissed and you will be forced to repay creditors without court protection.
- You Only Have 3-5 Years to Pay It All Off: Your repayment plan must repay debts within three to five years. Therefore, you need to make sure you can actually do so before trying Chapter 13.
Thinking about Filing for Bankruptcy? Hire an Attorney to See Which Option Is Best for Your Financial Situation
Whether you are looking at Chapter 11 or 13, you should consult with a local bankruptcy attorney first.
The attorneys at Hames, Anderson, Whitlow & O’Leary help consumers and businesses find the right bankruptcy solution based on their financial situation and their future goals.
If you are torn between Chapter 11 and 13, come in for a confidential consultation and we can help you pick the type that will work best for you. Then we will help you file the paperwork and go through the process so that you get debt relief as quickly as possible.
To get started, book a consultation with our bankruptcy team by calling our office, or connecting with us online to ask questions about bankruptcy.