Definition
Chapter 11 and Chapter 13 are parts of U.S. bankruptcy law that allow businesses and individuals to reorganize their debts. Chapter 11 is typically used by businesses to restructure their debts and obligations while continuing operations, whereas Chapter 13 is used by individuals to create a plan to repay debts over a period of three to five years, often while retaining assets like a home or car. Thus, the main difference lies in who it is designed for – businesses versus individuals – and how debt is handled.
Key Takeaways
- Chapter 11 bankruptcy is typically used by businesses and corporations, allowing them to restructure their debts and pay them off over time. This often involves a restructuring or reorganization of the business.
- Chapter 13 bankruptcy is predominantly used by individuals, not businesses. It involves setting up a repayment plan to pay off debts over a period of three to five years, instead of liquidating the debtor’s assets.
- Both Chapter 11 and Chapter 13 allow the debtor to retain their assets, unlike Chapter 7 bankruptcy, but the efficacy and applicability of each depends heavily on the size, type, and financial situation of the debtor. Therefore, it’s crucial to consult with a bankruptcy attorney to determine the best fit for a particular situation.
Importance
Chapter 11 and Chapter 13 are important financial terms because they refer to different types of bankruptcy protection under U.S.
law, which allow entities or individuals facing financial distress a chance to restructure their debts and establish a plan for repayment.
Chapter 11 generally applies to businesses, allowing them to reorganize while remaining operational, beneficial for businesses that can become profitable again after restructuring.
On the other hand, Chapter 13 is designed for individuals with regular income, providing a way to retain their assets while gradually paying off debt, granting protections from foreclosures, repossessions, and wage garnishments.
Hence, understanding the difference is crucial for businesses and individuals to make informed decisions to protect their financial futures.
Explanation
Chapter 11 and Chapter 13 are specific sections of the U.S. Bankruptcy Code, providing different types of debt relief for individuals and businesses facing financial hardships. Chapter 11, primarily applicable to businesses, allows them to reorganize and restructure their debts while continuing to operate.
The purpose of this chapter is to enable financially distressed businesses to propose a plan for profitability post-bankruptcy, while paying creditors over time. It can provide a fresh start, while protecting from liquidation, which can safeguard jobs and assets connected to the business. On the other hand, Chapter 13 is generally suited for individual debtors, including sole proprietors.
It provides individuals with a legal pathway to restructure their financial obligations and establish a repayment plan for their debts over a three to five-year period. Its primary purpose is to allow individuals to keep their assets – like their home or car – that they might otherwise lose in the bankruptcy process. By adjusting debt obligations and creating a manageable repayment plan, Chapter 13 provides individuals a way to regain control of their financial situation without the total liquidation typically associated with a Chapter 7 bankruptcy.
Examples of Chapter 11 vs Chapter 13
Hertz Global Holdings Inc. (Chapter 11): The second-largest car rental company in the U.S., Hertz Global Holdings Inc., filed for Chapter 11 bankruptcy protection in MayThe company had been overwhelmed by debt, and the COVID-19 pandemic had further dented its operations. Chapter 11 allowed Hertz to continue functioning whilst restructuring and reducing its debt.
PG&E Corporation (Chapter 11): One of the largest combined natural gas and electric energy companies in the United States, PG&E filed for Chapter 11 bankruptcy protection in JanuaryThis was after a series of wildfires in California, for which the company’s equipment was deemed responsible, led to liabilities of more than $30 billion. Through Chapter 11, PG&E was able to continue its operations while creating a plan to resolve its debts.
Individual Case (Chapter 13): A restaurant worker fell behind on their mortgage payments due to unexpected medical bills. Instead of liquidating their assets with Chapter 7, which would likely mean losing the home, they chose ChapterThey were able to set up a three to five-year repayment plan for the overdue amounts and continue making the regular mortgage payments. This allowed them to keep their home while paying off their debts in a manageable way. Please note that these examples are simplified and the actual bankruptcy process is complex and subject to various legal factors.
FAQs: Chapter 11 vs Chapter 13
What is Chapter 11?
Chapter 11 is a type of bankruptcy that involves the reorganization of a debtor’s business affairs, debts, and assets. Named after the U.S. bankruptcy code 11, corporations generally file Chapter 11 if they require time to restructure their debts.
What is Chapter 13?
Chapter 13 is a type of bankruptcy in which the debtor repays all or a portion of their debts through a payment plan. Typically, individuals file Chapter 13 when they have a regular income and want to keep their property.
What are the key differences between Chapter 11 and Chapter 13?
While both types of bankruptcy can provide relief to debtors, there are key differences. Chapter 11 is generally used by businesses, while Chapter 13 is for individuals. Chapter 11 involves reorganizing a business’s affairs, debts, and assets, while Chapter 13 involves creating a payment plan to pay off debts.
Who can file for Chapter 11 and Chapter 13?
Chapter 11 can be filed by corporations, partnerships, and in some cases, individuals with large debts and assets. Chapter 13 is generally filed by individuals with regular income who have unsecured debts less than $394,725 and secured debts less than $1,184,200.
Which is a better option: Chapter 11 or Chapter 13?
The better option between Chapter 11 and Chapter 13 depends on an individual’s or a business’s specific circumstances. Generally, if the debtor is an individual with more manageable debts, Chapter 13 may be preferred. If the debtor is a business that needs time to restructure its debts and operations, Chapter 11 may be a better option.
Related Entrepreneurship Terms
- Bankruptcy Code
- Debt Reorganization
- Creditors Committee
- Repayment Plan
- Discharge of Debts
Sources for More Information
- U.S. Courts: A federal court site that encompasses documents and resources directly related to chapter 11 and chapter 13 laws.
- Investopedia: A trusted web resource for investing and personal finance education. This includes information on the difference between Chapter 11 and Chapter 13 bankruptcy.
- NerdWallet: A personal finance website that provides information and tools in various areas of personal finance, including bankruptcy.
- Bankrate: A consumer financial services company that provides free rate information to consumers on more than 300 financial products, including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. It also includes information on bankruptcy.
