Chapter 11 vs Chapter 13 – Both chapters of bankruptcy provide debt relief for individuals and self-employed debtors. Both chapters allow individuals to reorganize their debts into a manageable bankruptcy plan. However, these bankruptcy chapters are very different. Most individuals seeking bankruptcy relief file under Chapter 13 instead of Chapter 11.
Which Bankruptcy Reorganization Works for Me?
A debt reorganization plan can solve your financial problems if you struggle with debts. However, Chapter 11 bankruptcy works better for business entities and individuals whose debts exceed the Chapter 13 bankruptcy limits. So, what is better for my situation, Chapter 11 vs Chapter 13?
What Is a Chapter 11 Bankruptcy Case?
Chapter 11 debtors reorganize their debts under the supervision of the United States Trustee’s Office. Typically an individual Chapter 11 trustee is not appointed to oversee the case. Therefore, the debtor must handle most of the duties that a bankruptcy trustee would handle. The debtor becomes a debtor-in-possession. That means the debtor retains their assets and continues to operate their business.
The debtor proposes a detailed Plan of Reorganization. The debtor has the exclusive right to file a Plan of Reorganization for the first 120 days of the case. If the court does not extend the deadline and the debtor fails to file a plan, creditors may file a proposed plan.
The plan provides creditors with an explanation of how the debtor intends to reorganize their debts. It often includes surrendering some assets, renegotiating contracts to lower payments, and proposing to lower the debts on some assets at the value of the asset.
In a Chapter 11 bankruptcy, the creditors vote to approve or disapprove the proposed plan. There are several “classes” of creditors in a Chapter 11 case.
Chapter 11 classes include:
- Secured Creditors – A lien secures all debt on one or more assets
- Priority Unsecured Creditors – No collateral secures the debt, but the debt is paid before general unsecured debts,
- General Unsecured Creditors – Debt is not secured by collateral, and they have no priority over other debts.
- Equity Security Holders – Hold an equity security in the debtor company, such as shareholders.
Creditors who are impaired by the proposed plan (they will not receive payment in full for their debt) vote in favor of or against the plan. At least one class of creditors must approve the plan before the court can confirm the plan. To confirm the plan, the court must find that it meets specific criteria such as:
- The plan has the ability to succeed (feasibility)
- The debtor proposed the plan in good faith
- The plan is fair and equitable
- The plan is in the best interests of the creditors (they receive as much or more than they would if the debtor files Chapter 7)
Once a Chapter 11 plan is confirmed, the company is not legally liable for dischargeable debt. Individuals filing under Chapter 11 do not receive a discharge until they complete the Chapter 11 plan. The debtor must complete the Chapter 11 plan. The Chapter 11 plan is a legally binding contract with the creditors.
Chapter 11 Plans Have Numerous Filing Requirements and Costs
When you compare Chapter 11 vs Chapter 13, there are two distinct differences for individual filings. Some differences between Chapter 11 vs Chapter 13 cases include, but are not limited to:
- Open and use new bank accounts entitled “debtor-in-possession” instead of personal bank accounts
- The debtor must close all books and records as of the Chapter 11 filing date, maintain the old records, and begin a new set of records
- Provide certificates of insurance for all insurable assets
- Provide numerous financial and business records to the United States Trustee’s Office before the Initial Debtor Interview
- File monthly operating reports accounting for all receipts, payments, and dispositions of property
- Chapter 11 debtors must pay quarterly fees to the United States Trustee’s Office based on their disbursements during the quarter
- Obtain approval for the employment of professionals, including accountants, attorneys, tax professionals, etc.
In other words, a Chapter 11 case is much larger, more complicated, and fare more costly than a Chapter 13 case. Chapter 11 cases are generally best-suited for companies and high-wealth individuals. The requirements and documents are extremely complicated, and require the assistance of an experienced Chapter 11 bankruptcy lawyer.
What Is a Chapter 13 Bankruptcy Case?
Chapter 13 bankruptcy cases allow individuals and couples to reorganize their debts by entering a monthly repayment plan. When you compare Chapter 11 vs. Chapter 13, a Chapter 13 case is much less costly than a Chapter 11 filing. Also, the filing requirements in a Chapter 13 case are not near as exhaustive or demanding as a Chapter 11 case.
When you file Chapter 13, the court appoints a Chapter 13 trustee. The Chapter 13 trustee oversees your case. They are responsible for receiving your monthly payments and paying your creditors under the terms of your confirmed plan. Therefore, you pay your monthly bankruptcy plans and mortgage payment (if you have a mortgage). Most individuals do not have any other debts outside of the bankruptcy plan they must pay.
For most individuals, the only debt they owe when they complete their Chapter 13 plan is their mortgage payment. So while it might be overwhelming to commit to a three to five-year bankruptcy plan, it can result in a much stronger financial position when you complete the plan.
Why Should I Choose Chapter 13 Instead of Chapter 11?
Advantages of Chapter 13 vs. Chapter 11 include:
- Less costly
- Protect co-debtors
- Less paperwork
- Creditors do not vote on a plan, but they can object to the plan (the court settles objections)
- No quarterly fees
Business entities cannot file under Chapter 13. However, business owners and self-employed individuals can file under Chapter 13. They must provide evidence of a stable income that allows them to pay their Chapter 13 plan payments. However, they can continue to operate their business while taking care of their personal debts.
Take the Chapter 13 calculator below to help estimate your Chapter 13 plan payment and all-in cost.
How Do I File a Chapter 13 Bankruptcy?
The first step in filing a Chapter 13 bankruptcy would be to determine if you are eligible to file bankruptcy. Next, you need to calculate your disposable income to determine how much money you must pay toward unsecured debts. Creating a workable monthly budget is crucial to calculating a Chapter 13 plan. Chapter 13 bankruptcy plans include amounts for:
- Past due mortgage payments
- Car loans (may be eligible to reduce interest and/or amount due on loan)
- Past due domestic support payments (alimony and child support)
- Administrative fees (including attorneys’ fees included in the plan)
- Unpaid tax debts and other priority debts
- Unsecured creditors
Calculating a Chapter 13 plan can be complicated, especially when you want to value assets to lower the amount owed to secured creditors, avoid judicial and non-possessory liens (i.e., judgments and liens on household goods), or assume executory contracts or unexpired leases.
You would then need to complete and fille all required bankruptcy forms. You would also be responsible for responding to and settling any objections to Chapter 13 plan.
Most individuals hire a Chapter 13 bankruptcy lawyer to prepare bankruptcy forms and file their cases. Hiring a bankruptcy lawyer has numerous advantages. A bankruptcy lawyer determines whether you qualify to file Chapter 13. The attorney examines your assets and uses bankruptcy exemptions to protect your assets from creditors. Furthermore, your lawyer understands how to calculate a Chapter 13 plan to create the lowest possible Chapter 13 plan payment for your case.
If you file a Chapter 13 bankruptcy without a lawyer, you are responsible for understanding bankruptcy law, procedures, and court rules. In addition, you must complete your Chapter 13 bankruptcy forms and the Chapter 13 plan without legal advice. The result could be lost assets and a higher Chapter 13 plan payment.
Many Chapter 13 bankruptcy lawyers include their attorneys’ fees in a Chapter 13 plan. Therefore, hiring a bankruptcy attorney can be affordable. Ascend helps you find a bankruptcy lawyer who offers free bankruptcy consultations in your area. You learn more about bankruptcy and how filing Chapter 13 can help you.
How Can Filing Chapter 13 Help Me Solve Debt Problems?
Chapter 13 can protect assets from creditors, stop foreclosures and repossessions, reduce overall debts, and allow debtors to get out of debt by making affordable monthly payments for three to five years to a Chapter 13 trustee. Furthermore, Chapter 13 allows some debtors to lower the amount they owe on their vehicles to make it more affordable to keep their cars. Likewise, reducing the amount you owe on unsecured debts can also help you repay your debts.
In a Chapter 13 case, general unsecured creditors receive a portion of the amount you owe them. The percent is based on your income, expenses, assets, and other factors. Generally, you must pay your disposable income to your unsecured creditors. However, for most debtors, the amount typically equals a small percentage of the amount owed. When you complete your Chapter 13 plan, the remaining money owed to general unsecured creditors is discharged. In other words, you do not repay the discharged amount.
Priority unsecured creditors must be paid in full. Those creditors include most amounts owed to the government, alimony, child support, restitution, judgments related to DUI accidents, and tax debts. However, some old tax debts become general unsecured debts, so you only pay a portion of the amount owed for old taxes.
Ascend has several tools to help you determine whether you should file a Chapter 13 bankruptcy case. You can contact us to discuss your debtor problems during a free case review. You can also use one of our many Chapter 13 bankruptcy tools, including our Chapter 13 calculator. Watch our Youtube video about Chapter 13 and learn more about Chapter 13 filings to learn whether filing Chapter 13 is worth it.
Call Ascend for Free Help with Debt Problems
If you have debts you cannot pay, call or text us at (833) 272-3631 or contact us online for a free case evaluation. We want to help you find an affordable way to get rid of debts you cannot pay. We can help you put debt problems behind you so that you can move forward free of debts with a solid financial future for you and your family. You can also take our free Bankruptcy Calculator below to see which option may be best for you.