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.

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.read more 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. read more is the one responsible for all the time frame approvals.

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What is Chapter 13 Bankruptcy?

Chapter 13 of the bankruptcyBankruptcyBankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt.read more 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.read more 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.read more 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.

Key Difference

  • 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.read more 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.
  • read more 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.
  • read more may be restricted from cramming down by a particular class of creditors.

Chapter 11 vs Chapter 13 Comparative Table

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.read more 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: –

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