Reorganizing Your Debt? Chapter 11 or Chapter 13 Bankruptcy Can Help!

If you’re exploring how bankruptcy can help you deal with your debts, you’ll want to learn about the different types, called chapters of bankruptcy. The most well-known chapters of bankruptcy filed by individuals (and married couples) are Chapter 7, Chapter 13, and Chapter 11 bankruptcies. Each type of bankruptcy operates differently.

• A Chapter 7 liquidation bankruptcy case can erase debts without a repayment plan.

• A Chapter 13 reorganization bankruptcy case requires a repayment plan.

• A Chapter 11 case might include a repayment plan. Chapter 11 cases are mostly filed by businesses or people with significant assets and debts.

Chapter 7 and Chapter 13 are the most common chapters filed by individuals. Read on to learn more about the differences between Chapter 11 and Chapter 13 bankruptcies.

Who Can File Chapter 13 vs. Chapter 11?

Only individuals and married couples can file Chapter 13 bankruptcy. Individuals, married couples, and businesses can file Chapter 11. Any type of business entity can file for Chapter 11, including corporations, partnerships, limited liability companies (LLCs), and small business owners.

The United States Bankruptcy Code sets debt limits for Chapter 13. People with debts greater than the set limits aren't eligible to file for bankruptcy relief under Chapter 13. The debt limits are adjusted every three years. Currently, if your unsecured debts (e.g. credit card debt, medical bills) add up to more than $465,275 or your secured debts (e.g. mortgages, car loans) total more than $1,395,875 then you can't file Chapter 13.

The majority of bankruptcy filers owe less than the Chapter 13 debt limits. But large debts, like six-figure student loans or having multiple real estate mortgages, can push individuals past the debt limits. Since Chapter 11 bankruptcy cases don't have debt limits, people with high debts that aren't eligible for Chapter 13 may be able to file for relief under Chapter 11.

How Long Does It Take To Complete a Chapter 13 vs. Chapter 11 Case?

The Bankruptcy Code sets the length of time it takes to complete a Chapter 13 bankruptcy, but there’s no rule on how long a Chapter 11 case will take. Depending on the specifics of the case, a Chapter 11 bankruptcy may last a shorter or longer time than a Chapter 13 case. 

Chapter 13 bankruptcy creates a reorganization plan, which requires filers to send monthly payments to the bankruptcy trustee. The amount of your plan payment is calculated based on your monthly income and allowable expenses. This figure represents your disposable income. That's what’s left after you pay all your necessary monthly expenses. If you file for Chapter 13 bankruptcy, you’ll have to make plan payments for 3–5 years depending on your income.

The 36 month minimum plan duration is for people whose income falls below their state’s median income when adjusted for household size. A Chapter 13 plan can only be shorter than 36 months if all allowed claims filed by creditors are paid in full. People who have income above their state’s median for their household size have to make Chapter 13 plan payments for no less than 60 months (unless everything is paid in full sooner).

The timeline to complete a Chapter 11 depends on what the reorganization plan says. The filer has the chance to restructure and renegotiate the terms of paying back their creditors. Chapter 11 cases can be closed while the filer completes the reorganization plan terms and reopened once they've completed the plan to request entry of discharge. Closing the case while carrying out the plan saves money on administrative costs.  

What Else Is Different in a Chapter 13 vs. Chapter 11 Case?

Chapter 13 bankruptcy is also called a wage earner’s plan and requires the filer to have regular income because they must be able to make their monthly plan payment. Income can be from employment, a business, or other verifiable sources. Chapter 11 bankruptcy allows for a plan of reorganization or liquidation, so it isn’t always necessary for a Chapter 11 filer to have regular income. 

The plan and supplements to the plan are different in Chapter 11 bankruptcy. The information required in a Chapter 13 plan can be a lot less detailed than the contents required in a Chapter 11 plan. The U.S. Bankruptcy Court offers a national model plan for Chapter 13 cases. This plan may be appropriate in some cases, but plans must also follow the rules of the judicial district and local rules where the case is filed. The U.S. Bankruptcy Court offers a model plan of reorganization for small business under Chapter 11, but not for other types of businesses or for individuals. 

The U.S. Bankruptcy Code requires Chapter 13 filers to also file the Chapter 13 plan. The code doesn't require Chapter 11 filers to be the one that files the plan. In Chapter 11, a creditor can file a reorganization plan the filer's exclusive right to file expires. A creditor can file a plan if the bankruptcy filer doesn't file one or hasn't filed one the creditors will approve.

Also, the Bankruptcy Court must approve all Chapter 13 plans. Chapter 13 creditors may object to plan confirmation, but they don't get to vote on whether to approve the plan. In Chapter 11 cases, the creditors get to vote on plan confirmation.  

Chapter 11 bankruptcy also requires a disclosure statement, which isn't necessary in a Chapter 13 bankruptcy. The disclosure statement must give “adequate information” on the filer’s financial affairs so that creditors are able to make an informed judgment about the reorganization plan. The Bankruptcy Court must hold a hearing to determine whether to approve a disclosure statement. However, in small business cases, the court may determine that the Chapter 11 reorganization plan itself provides adequate information for the creditors and that a separate disclosure statement isn't necessary. 

Another way Chapter 13 bankruptcy cases are different from Chapter 11 cases is that a standing trustee administers all Chapter 13 cases. As soon as a Chapter 13 case is filed, one of the Chapter 13 bankruptcy trustees for the district is appointed to the case. One of the duties of the Chapter 13 trustee is to collect the monthly plan payments and then distribute the money to the creditors according to the Chapter 13 plan. A Chapter 11 bankruptcy may or may not have a trustee. The Bankruptcy Code doesn’t require Chapter 11 cases to have a trustee. In a Chapter 11, the filer can act as debtor in possession, essentially filling the role of the trustee. 

What's the Cost Difference Between Chapter 13 and Chapter 11?

A Chapter 11 case can be a lot more expensive than a Chapter 13 case. The court filing fee for a Chapter 13 case is $310.00. The court filing fee for a Chapter 11 case is $1,717. Since Chapter 11 bankruptcy cases are more complex than Chapter 13 cases, attorney’s fees are generally also much higher.

In a Chapter 13, case the bankruptcy trustee appointed to the case earns a fee that's paid by the plan payments. In a Chapter 11 case, the United States Trustee earns payment for overseeing many aspects of the case. The debtor in possession (the Chapter 11 bankruptcy filer that keeps possession and control of its assets during reorganization) must pay a quarterly fee to the U.S. Trustee until the case is converted or dismissed. The fee ranges from $325 to $30,000 and depends on how much the filer disbursed during the quarter.

This quarterly fee is why some Chapter 11 cases are closed while the filer continues to carry out the terms of the plan. The filer later asks the court to reopen the case to enter the discharge of their debts. Filing a motion to reopen a Chapter 11 case costs $1,167, which is far less expensive than paying the quarterly fees to the U.S. Trustee for the duration of the plan.

How Do I Decide Which Chapter To File?

Deciding whether to file Chapter 13 or Chapter 11 requires you to look at the factors outlined in this article. If your secured or unsecured debts are higher than the debt limits for a Chapter 13, then you may have to file a Chapter 11 case. If your business needs to file for bankruptcy protection, then Chapter 13 isn’t an option.

Reorganization bankruptcy cases are complex, so if you’re considering filing for Chapter 13 or Chapter 11, it’s a good idea to speak with a bankruptcy lawyer about your situation. Anyone filing either Chapter 13 or 11 should seriously consider hiring an attorney to help them. Both chapters involve complex proceedings, and they often fail when filed without legal assistance.