Chapter 11 vs Chapter 13

There are notable distinctions on Chapter 11 vs Chapter 13 bankruptcy. These disparities encompass eligibility criteria, associated expenses, and the duration of the process. Both bankruptcy alternatives enable debtors to restructure and sustain their businesses while affording them the chance to discharge debts. Nevertheless, Chapter 13 offers a more extensive range of debt discharge possibilities compared to Chapter 11.


Chapter 11

Nearly anyone can file for Chapter 11 bankruptcy, including individuals, businesses, partnerships, and joint ventures. There is no income or debt limit requirement. However, Chapter 11 bankruptcy is generally the most complicated and expensive option and is more commonly used by companies rather than individuals.

Chapter 11 bankruptcy allows companies to continue their operations while they restructure their debts. Filers have the opportunity to present a plan of reorganization, which may involve downsizing or implementing expense reduction strategies.

This is especially true during economic distress, such as the financial crisis of 2007-2008 or the COVID-19 pandemic. For instance, in these situations, individuals and businesses alike may find it necessary to pursue Chapter 11 bankruptcy to address their financial challenges.

  • General Motors and Chrysler both filed for Chapter 11 bankruptcy in 2009. They received emergency loans as they restructured their businesses. GM’s bankruptcy filing in 2009 was the third largest and the biggest industrial bankruptcy ever.
  • Several prominent companies have failed due to the coronavirus and its subsequent effects. Both JCPenney and J. Crew, retailers, have announced that they will file for Chapter 11 due to their debt. J. Crew was able to continue with its plans to open new locations, despite JCPenney being forced to close 175 stores. 
  • Neiman Marcus, however, has fewer stores post-pandemic. On the other hand, Hertz has sold 568,000 cars and has been bought by two companies.

SVB Financial Group filed for Chapter 11 bankruptcy in March 2023 to reorganize, a week after federal officials shut down the bank to protect its depositors. The bank reported losses in its investment division, primarily attributed to the decrease in the value of its bonds as interest rates increased. Consequently, there was a run on customer deposits.


Chapter 13

Chapter 13 bankruptcy is only available to individuals with a stable income. In contrast, Chapter 7 has income limits that vary from state to state.

Individuals who file for Chapter 13 bankruptcy must create and submit a repayment plan for their debts within 3-5 years. In most cases, filers are allowed to retain certain assets such as their home or automobile. This plan is commonly referred to as a wage earner’s plan. Individuals make monthly payments to a trustee who then distributes the funds to their creditors. It is generally expected that the amount paid to creditors will be equal to or greater than what they would receive in a bankruptcy proceeding.


Why File for Chapter 11?

It is important to prevent the permanent closure of a company by filing for Chapter 11 bankruptcy, provided that the company is in a financial position that allows for restructuring. By staying in business and reorganizing its debt, the company stands a better chance of resolving its financial issues. However, it’s worth noting that Chapter 11 bankruptcy has its downsides, such as complexity and cost, and it is often not readily available to smaller businesses.

The Small Business Reorganization Act of 2019 introduced a new Subchapter 5 within Chapter 11 to simplify the bankruptcy process for small businesses. According to the U.S. Department of Justice, small businesses under this act are defined as “entities with less than $2.7 million in debts and meeting other specified criteria.” This act imposes shorter timelines for completing the bankruptcy process and provides greater flexibility in negotiations with creditors, offering small businesses more favorable conditions for restructuring.


Why File for Chapter 13?

Chapter 13 bankruptcy allows individuals to file and avoid the liquidation of all their assets. It is commonly utilized to prevent the forced sale or foreclosure of a home, which Chapter 7 cannot achieve. While Chapter 11 can also assist in preventing a home sale, its high cost and complexity make it less feasible for many individuals. It’s important to note that not everyone is eligible to file for Chapter 13 bankruptcy, as it requires a stable income and adherence to the debt limit of 2.75 million dollars.


Chapter 11 vs 13 Bankruptcy

In Chapter 11 bankruptcy, the appointment of a trustee is optional. The trustee has various responsibilities, including reviewing the bankruptcy plan, providing recommendations to the court, collecting and distributing payments from creditors, as well as assisting with the collection and distribution of funds.

While the duration of a Chapter 11 plan can be as long as the debtor desires, most plans are designed to last three to five years. In cases where debtors require additional time to repay their debts, the court may grant extensions to the Chapter 11 plan.

Approval for Chapter 13 bankruptcy is typically faster. During the commitment period, which usually spans three to five years, the debtor is required to allocate all disposable income for distribution to creditors. The commitment period can be reduced but generally cannot be extended, except in specific circumstances.


Changes Due to the COVID-19 Pandemic

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, introduced several changes to bankruptcy laws to offer more options to businesses and individuals facing economic hardships caused by the pandemic.

These changes include raising the debt limit for Chapter 11 Subchapter 5 to $7,500,000, excluding federal emergency payments related to COVID-19 from being considered as “current monthly income” for Chapter 7 and Chapter 13 cases, and allowing Chapter 13 Repayment Plans to be extended for up to seven years. It is important to note that these changes apply to bankruptcy cases filed after the enactment of the CARES Act and are set to expire one year later.


What Are the Main Differences Between a Chapter 11 Bankruptcy and a Chapter 13 Bankruptcy?

Anyone can file for bankruptcy under Chapter 11, including individuals, businesses, partnerships, joint ventures, and LLCs. There are no limitations on who can file under Chapter 11, and the filer is not required to meet specific debt limits. On the other hand, Chapter 13 bankruptcy is more commonly utilized by individuals with a stable source of income. Unlike Chapter 11, Chapter 13 filers need to meet certain debt limits to qualify.

Chapter 13 bankruptcy involves the appointment of a trustee, while Chapter 11 bankruptcy does not require one. Generally, Chapter 13 bankruptcy cases receive faster approval compared to Chapter 11.


Who Can File a Chapter 11 Bankruptcy?

Chapter 11 bankruptcy can be filed by virtually anyone, including individuals, partnerships, joint ventures, limited liability companies, and businesses. Most businesses opt for Chapter 11 bankruptcy as a means to avoid permanent closure. However, for the process to be successful, the business must be in a position to restructure its loans.


What Happens After a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also referred to as a wage earner plan, enables individuals who file for bankruptcy to propose a repayment plan for repaying all their debts, given they have a regular income. The plan must be approved by the court, and the debtor is obligated to adhere to the terms of the plan. Once the obligations have been fulfilled, the debtor may receive a discharge. It is important to note that laws and regulations about bankruptcy can undergo frequent changes, so it is advisable to seek guidance from a professional to fully comprehend your rights and responsibilities.


The Bottom Line

When a business or individual is unable to pay its debts, they have the option to file for bankruptcy. The bankruptcy process starts with the submission of a bankruptcy petition and concludes with a discharge. There are various types of bankruptcy, including Chapter 11 and Chapter 13. Chapter 11 can be filed by almost anyone, while Chapter 13 is specifically designed for individuals with regular income who meet certain debt limits. These bankruptcy filings allow individuals to repay their debts through a proposed repayment plan. As with any significant financial decision, it is advisable to seek professional advice.


Need Help Filing for Chapter 11 Bankruptcy in Jacksonville, FL?

If you’re facing financial challenges and considering Chapter 11 bankruptcy in Jacksonville, FL, Bruner Wright is here to provide the expert guidance and support you need. Our experienced team understands the complexities of bankruptcy law and is committed to helping businesses navigate through this difficult process. 

With our deep knowledge of local regulations and a track record of successful cases, we are ready to assist you in developing a strategic plan tailored to your unique circumstances. Take the first step towards financial stability by contacting Bruner Wright today. 

Schedule your consultation and let us guide you towards a brighter future.

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