When business owners call us with questions about filing bankruptcy, they ask us how to decide between Chapter 11 and Chapter 13. Is there a big difference? Are there significant advantages to one over the other? They want to know what the risks and benefits are when the choice is Chapter 13 vs. Chapter 11. Both bankruptcy chapters are designed to help you survive by restructuring the debt. You might be thinking, “Wait, isn’t that what debt settlement is all about?” While both bankruptcy and settlement may restructure debt, they do so in different ways and with different results. We are Delancey Street, a business debt settlement company, and we hear this question a lot. And that’s why, in this blog post, we’re going to outline six important differences between Chapter 11 vs. Chapter 13 for business owners.
Chapter 13 Bankruptcy Is for People
The first difference is who can file. Chapter 13 is also known as a wage earner’s plan. Chapter 13 bankruptcy is for people. Because only people can file, a sole proprietor is eligible to file Chapter 13 for both personal debts and business debts, as the owner and the business are considered the same under the law. A partnership, LLC or corporation can’t file Chapter 13 bankruptcy. If that describes your business structure, consider Chapter 11 instead. Chapter 11 allows a business to reorganize debts while the business continues to operate.
The second difference is whose name the case is in and what debts it covers. For a sole proprietorship, the bankruptcy case is filed in the business owner’s name, not the business name. It covers both personal and business debts. The required paperwork for sole proprietors filing for Chapter 13 includes personal income and expenses, business income, business debts and business assets. These figures must be backed up by documents like tax returns, profit-and-loss statements, bank statements, receipts, payroll records and invoices.
The third difference is what the repayment looks like. In Chapter 13, an individual debtor can reorganize debts and pay them off over three to five years using a repayment plan. Assets are not liquidated, like they are in a Chapter 7 bankruptcy. In the most common Chapter 13 situation, the filer will have a repayment plan that combines all of his or her debts into one set of monthly payments that the filer can afford. The filer will have a plan in place that takes the person’s income and expenses into account. In filing for Chapter 13, a sole proprietor can keep the assets that the business needs to continue operating, like business equipment. Rather than an individual repayment plan, Chapter 11 is the more comprehensive reorganization of a business’ debts. It allows the business owner to continue operating their business while restructuring its debts.
The fourth difference is what happens with priority debts and loans, and with balance left over. These are features of Chapter 13, and an LLC or corporation cannot use them through Chapter 13 at all. The filer’s priority debts, such as taxes and domestic support obligations, will be paid off through the Chapter 13 plan. Some Chapter 13 debtors may also be able to “cram down” a secured loan, such as a car loan or equipment loan. They’ll reduce the debt to the value of the collateral as it exists today, which can result in substantial savings. At the end of the plan, the remaining balance on other qualifying debts will be wiped out or “discharged.”
The fifth difference is cost. In terms of costs, filing Chapter 11 is more expensive than filing Chapter 13. That being said, Chapter 11 is an all-inclusive reorganization of debt for a business.
The sixth difference is that Chapter 11 has a small business option. Called Subchapter V, it is a simplified version of a Chapter 11 filing that is better suited for small businesses that don’t necessarily need the “big guns.” Subchapter V allows for a modified Chapter 11 bankruptcy where a business must have less than $7.5 million in debt and must not be a single asset real estate company. It is more accessible and less expensive for a small business to restructure their debt using Subchapter V as compared to a regular Chapter 11 filing.
If you run your business as a sole proprietor, you can take advantage of a Chapter 13 bankruptcy filing, but if you are operating as an LLC, corporation or partnership, then you should consider filing for Chapter 11. If your business qualifies, Subchapter V is a streamlined version of Chapter 11 that might be helpful to your small business. Consider this comparison to choose a way to deal with your debts. It’s a tough decision and you may need a personal consultation with an expert that understands your situation. At Delancey Street, we negotiate with merchant cash advance funders and lenders on your behalf for less than the full balance. If bankruptcy is the better solution, we will refer business owners to an independent bankruptcy lawyer. The initial consultation is always free and confidential.
