Chapter 11 vs. Chapter 13 bankruptcy: What’s best for your small business?

Falling behind on debts doesn’t necessarily mean the end of your small business. Declaring Chapter 11 or Chapter 13 bankruptcy can let your company continue running, give your creditors as fair a deal as possible, and help you get a new start.

Making the right choice between Chapter 11 and Chapter 13 bankruptcy takes an in-depth understanding of each option.

Chapter 11 vs. Chapter 13 bankruptcy at a glance

• Chapter 11 bankruptcy is used by businesses to restructure debts and assets. The company continues operating and repaying creditors, typically without supervision by a trustee.
• Chapter 13 bankruptcy is used by people with a regular income and debts under $2,750,000 to repay their creditors over a set number of years while supervised by a trustee.

Chapter 11 bankruptcy

Almost anyone can file Chapter 11 bankruptcy. There are no income or debt requirements.

Your goal under Chapter 11 is to keep your company operating so you can pay off your creditors. To make that possible you’ll work out a plan in bankruptcy court with your creditors that might include renegotiating debts so you make smaller payments over a longer term, finding ways for your business to cut costs, and selling off certain assets.

You’ll be considered a debtor in possession under this plan. That means for the most part you can run your company as normal without the oversight of a court-appointed trustee. There are a few key exceptions. You won’t be able to significantly change how your business operates, enter contracts with vendors, or make certain other decisions without first getting permission from the United States bankruptcy court.

You must take a credit counseling course within the past 180 days before filing a Chapter 11 bankruptcy petition.

The role of bankruptcy lawyers

Chapter 11 bankruptcy is complicated and time-consuming. It requires examining your existing contracts with vendors to determine how they could be modified, negotiating down debt, and potentially finding new financing options so your company can continue running. All those different aspects must then be put together into a plan that gets approved by the bankruptcy court and your creditors. This requires a lot of specialized knowledge.

A Chapter 11 bankruptcy attorney helps you navigate each of these different areas. They work so that your debts get reorganized with the most favorable terms possible for you, and that the plan presented to the bankruptcy court gets approved as fast as possible.

The biggest initial role your attorney would play is determining whether filing Chapter 11 bankruptcy, or filing bankruptcy at all, is right for your company. This is the most complicated and costly form of bankruptcy case, and usually carries high attorney fees. Your attorney will be able to tell you whether it’s the correct move for you.

How to file Chapter 11 bankruptcy

The first step in filing Chapter 11 bankruptcy is to file a petition with the bankruptcy court where your business is located. You’ll also need to file lists of all your assets and liabilities, current income and expenditures, current contracts and leases, and a statement of financial affairs.  

The bankruptcy court will charge you a case filing fee of $1,167 and a miscellaneous administrative fee of $571. The court will then begin the process of hearing your petition and working with you and your creditors to develop or approve your plan for paying back your debts.

Chapter 13 bankruptcy

Chapter 13 bankruptcy also lets you reorganize your debts to repay creditors. However, it’s only an option if your total secured and unsecured debts are under $2,750,000.

It’s also only an option for individuals, married couples, or sole proprietors. That means someone who ‘s a self-employed photographer could file Chapter 13 bankruptcy, but someone who ran a photography studio that employed other people could not.

You also require a regular income for Chapter 13 bankruptcy. That’s because you’ll work with a court-appointed trustee to consolidate your debts into one monthly payment you make for three-to-five years. After completing your payment plan the remaining debts get discharged, with a few exceptions.

The role of a bankruptcy lawyer

How much and how long you’ll be paying will be decided in court by you, the court, the bankruptcy trustee, and a bankruptcy lawyer if you choose to hire one. Here, your attorney helps you set a reasonable payment schedule that’s fair both to you and your creditors. Consumer bankruptcy attorneys can also manage your relationship with the trustee overseeing the plan.

A bankruptcy attorney will also work to ensure important items you need for keeping your small business functioning are protected during the bankruptcy proceedings.

How to file Chapter 13 bankruptcy

You’re required to take a credit counseling class within 180 days before you file Chapter 13 bankruptcy. You or your attorney will then file your petition, relevant financial information, and proposed payment plan with the court.  

Key differences between Chapter 11 and Chapter 13

The result of both Chapter 11 and Chapter 13 is the same: you work out a plan for paying creditors and discharge as much of your remaining debt as possible. There are still important differences.

Eligibility

Chapter 11 is open to almost anyone. Both companies and individuals can file Chapter 11 bankruptcy.

Chapter 13 bankruptcy is only available to individuals and sole proprietors. Your business can’t file Chapter 13 bankruptcy.

You must take an approved credit counseling course in the past 180 days before you’re eligible to file any type of bankruptcy.

Debt and income limits

There are no debt or income limits for Chapter 11 bankruptcy. You can file regardless of how much you owe, or how much you make.

You need a total combined total of secured and unsecured debt below $2,750,000 for Chapter 13 bankruptcy eligibility. You’re required to have a steady monthly income.

Procedural requirements and complexity

Chapter 11 bankruptcy law is complex. You’re essentially trying to negotiate a contract with all your creditors on how you’ll pay them back. It can take months for this to happen depending on the complexity of your situation. While there are free legal services available that can help with some of the work of filing bankruptcy, they're no replacement for a lawyer.

Chapter 13 is much simpler, especially for those who have retained consumer bankruptcy attorneys. You file your bankruptcy paperwork; attend a meeting to check your paperwork, get more information about your financial situation and proposed payment plan; and complete the confirmation process to ensure the court-appointed trustee and your creditors approve of this plan.

Repayment plans

There are no set timelines for repayment plans in Chapter 11 bankruptcy as it’s determined by what your creditors agree to. This may result in a payment plan that lasts a few months to some lasting over a decade.

Your income determines the length of a Chapter 13 bankruptcy repayment plan. Debtors making less than their state’s median income can expect a three-year payment plan. Those making more than the median income typically receive a five-year plan.  

Costs

Chapter 11 costs more than Chapter 13 bankruptcy. The court fees come in at a $1,738 filing fee and a $571 miscellaneous fee. You can also expect higher attorney fees for Chapter 11 due to its complexity.

Chapter 13 bankruptcy costs a $235 court filing fee and a $75 miscellaneous fee. Attorney fees are typically more affordable as it’s a simpler process than Chapter 11.

In both cases, you’ll be required to take a credit counseling course to help you better know how to avoid bankruptcy in the future. This typically costs around $50. Credit counseling agencies are required to offer this course for free for those unable to pay.

How to decide between filing Chapter 11 and Chapter 13

Choosing between Chapter 11 and Chapter 13 is serious. Making the wrong decision could cause legal headaches, prevent you from protecting certain assets like your house or car, and cost you more in the long run. It’s a choice that you should at least talk to a bankruptcy attorney about before making.

Consider these guidelines in deciding between Chapter 11 or Chapter 13.

When to choose Chapter 11 bankruptcy

• You own a business and are not a sole proprietor
• Your business has a positive cash flow
• You can afford higher attorney fees and court costs

As an example, let’s say you owned a campground in California with cabins for rent. A wildfire prevents you from renting out these cabins for months. You fall behind on your debts but know your operations can resume once this disaster passes. Chapter 11 lets you negotiate with your creditors so you can keep your business operating while paying back what you owe.

When to choose Chapter 13 bankruptcy

• You’re the sole proprietor of your business
• You secured and unsecured debts aren’t above $2,750,000
• You’re looking for a simple resolution as soon as possible

Say you worked as a freelance graphic designer. A medical condition leaves you unable to work for months, causing you to fall behind on your bills. You want to pay back your creditors while avoiding selling off the assets you need for your job, such as your expensive camera and computer equipment. Chapter 13 bankruptcy would let you work out a three-to-five-year payment plan with your creditors while you continue working.  

Pick the right option

Filing bankruptcy doesn’t mean throwing in the towel on the business you’ve worked so hard on building. Choosing Chapter 11 or Chapter 13 bankruptcy lets you work on forming a plan to pay creditors while keeping your company going. Talking to a bankruptcy attorney can help you decide the best option for your circumstances.  

FAQ

When does debt get discharged for Chapter 11 vs. Chapter 13 bankruptcy?

Debts get discharged under Chapter 11 bankruptcy according to the payment plan accepted by your creditors. That means some debt could get discharged as soon as the plan is accepted, and some once the payment plan ends.

Chapter 13 bankruptcy discharges all eligible debt at the end of the payment plan.

Can creditors still contact me or try to collect debts while I’m filing Chapter 11 or Chapter 13 bankruptcy?  

No. An automatic stay goes into effect once you’ve petitioned the court for bankruptcy. This keeps creditors from trying to collect on their debts or repossess property.

How long are the payment plans for Chapter 11 and Chapter 13 bankruptcy?

There’s no set time for Chapter 11 payment plans. It’s whatever you and your creditors negotiate.

Chapter 13 payment plans are three to five years long. If you make less than your state’s median income you can expect a three-year plan and five years if you make more than the median income.

Who can file for Chapter 11 and Chapter 13 bankruptcy?

Anyone can file Chapter 11 bankruptcy. The relevant bankruptcy laws don't include any debt or income requirements.

The Chapter 13 bankruptcy process is only available to those with less than $2,750,000 in secured and unsecured debt. The bankruptcy code only allows individuals or sole proprietors of businesses to file this form of bankruptcy.

Can I operate my business while filing Chapter 11 bankruptcy?

Yes. Chapter 11 bankruptcy cases considers debtors in possession, meaning they still own their business while the case is under consideration.

Kylie Ora Lobell contributed to this article.