Difference Between Chapter 11 and Chapter 13
Any individual or business can file chapter 11 of bankruptcy, which requires time to make the debt manageable to pay, and the court helps the entity restructure its obligations and liabilities. Chapter 13 bankruptcy, in contrast, provides for the adjustment of the debts that can be applied only by individuals with specific and stable income levels where the plan to repay the part or all of the obligations is made without exceeding five years.
Under the Bankruptcy Code, Chapter 11 and Chapter 13 are legal procedures that deal with the debt problems and payment obligations if the company decides to declare bankruptcy. The bankruptcy code is also a helpful tool for individuals who cannot pay off their debts and allows them to start afresh by liquidating the company’s assets and paying off their debts or proposing a complete restructuring of the organization.
Table of contents
What is Chapter 11 Bankruptcy?
Chapter 11 is most commonly used by small businesses. The chapter allows the company to draft a plan to help keep the business active while paying off its debt. The filing of a petition can be voluntary or involuntary. A debtor usually has a time frame of generally three to four months to develop a reorganizationReorganizationReorganization refers to the legal process of modifying, merging, or acquiring a company and its assets. Typically undertaken to solve low-profit margins, reasons for revamping vary as per the firm's needs. For instance, in 2017, Wall Street Journal had announced a major editorial reorganization to help the 128-year-old newspaper adapt to the requirements of digital news reporting. plan.
However, the timeline can be extended up to 18 months if there is a reason behind it. The trusteeTrusteeA trustee is an individual or institution with legal authority to manage the trust property and assets on behalf of the settlor to benefit the beneficiary. They have complete control over the trust assets until they get transferred to the beneficiary. The administration of assets goes as per the directions of the trust. is the one responsible for all the time frame approvals.
What is Chapter 13 Bankruptcy?
Chapter 13 of the bankruptcyBankruptcyBankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt. code concerns more about reorganizing the individual’s finance and less about eliminating debt. It also demands the debtor to make a monthly payment to a chapter 13 trustee for 36 months to 60 months that allow them the length of the plan to pay back past due amounts owed on houses, cars, and other loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment. that have a significant amount of collateral.
Both chapters allow debtors to propose a new restructuringRestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc. plan and modify their payment terms, which helps the company stay in business.
Chapter 11 vs Chapter 13 Infographics
Let’s see the top 10 differences between Chapter 11 vs. Chapter 13 bankruptcy.
- Under Chapter 11, there are no debt limits; however, under chapter 13, there is a debt limit cap.
- A chapter 11 debtor can take months to file a plan and make payments. However, a chapter 13 debtor must surrender a payment plan within 15 days of filing the petition.
- Under Chapter 11, the debtor has more freedom as no trustee is appointed than Chapter 13.
- Under Chapter 13, the petitioner can retainRetainA retainer is an arrangement between the firm and service provider wherein the service provider is paid an advance for services that will likely be needed in future. Retainers are commonly used in areas like law, accounting, HR. their property without paying the unsecured creditors. However, Chapter 11 allows the creditorCreditorA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. to object when fully repaid.
- Under chapter 13, a debtor can restructure many properties by only paying the collateral. In chapter 11, debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. may be restricted from cramming down by a particular class of creditors.
Chapter 11 vs Chapter 13 Comparative Table
|To file a petition under Chapter 11, the debtor must be a corporate, partnership, limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies. partnership, or individual.
|Under chapter 13, to qualify as a debtor, they must be an individual or a husband and wife to file jointly; any other party needs to file under chapter 11 of the bankruptcy code.
|When filing for chapter 11, one will be considered a small business debtor, and the debt must not exceed $2,490,925.
|You are eligible to file for Chapter 13 as long as you have not filed for chapter 7 for the past four years or Chapter 13 for the past two years.
|This chapter is more expensive than Chapter 13.
|This chapter is generally less expensive than Chapter 11.
|The process of this chapter is comprehensive.
|The method of this chapter is short.
|Under Chapter 11, a debtor may incur unsecured debt in the ordinary course of business without the court’s approval.
|Under Chapter 13, a debtor cannot incur any new debt without the consent of the court or the trustee.
|Chapter 11 allows no restriction or a mandatory deadline to file a plan under this chapter. However, payments do not begin until the court has approved and confirmed the financial proposal.
|Under Chapter 13, one must file a financial plan within 14 days of filling out the petition. The payment plan typically starts after 30 days of filing the plan.
|In Chapter 11, you need to create a plan to repay your debt. Unless there is a small business case, the creditors should vote, and the court should confirm.
|In Chapter 13, the business needs to keep the property or the assets in exchange for paying the creditors through [wsm-tooltip header="Disposable Income" description="Disposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes." url="https://www.wallstreetmojo.com/disposable-income/"]disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.[/wsm-tooltip].
|It is more complex than Chapter 13 and Chapter 11 bankruptcy that can be helpful for someone who does not qualify for Chapter 13.
|It is a much more straightforward and time-saving process than Chapter 11.
|There is no such requirement under this chapter.
|In Chapter 13, debtors must use all their disposable earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. to repay the creditors.
|Creditors can reject a proposed repayment plan.
|Under chapter 13, the creditors generally need to accept the repayment plan.
The bankruptcy code is useful for businesses. However, it is intended primarily for the reorganizationReorganizationReorganization refers to the legal process of modifying, merging, or acquiring a company and its assets. Typically undertaken to solve low-profit margins, reasons for revamping vary as per the firm's needs. For instance, in 2017, Wall Street Journal had announced a major editorial reorganization to help the 128-year-old newspaper adapt to the requirements of digital news reporting. of firms with heavy debt burdens. Declaring bankruptcy helps companies resolve their financial difficulties and helps rebuild their credit.
This has been a guide to Chapter 11 vs. Chapter 13 Bankruptcy. Here, we discuss the top differences between chapters 11 and 13 with infographics and a comparative table. You may also have a look at the following articles: –