Ben Todd | Apr 16, 2017 | 3
Chapter 11 Bankruptcy Vs. Chapter 13 Bankruptcy
Chapter 13 bankruptcy is covered in detail in this article, chapter 11 bankruptcy is covered, and this article touches on chapter 7 bankruptcy because it is related if you are an individual who is opting for bankruptcy. This article is suitable for individuals running a business, and the second half of the article is also suitable for individuals who are not running a business because it compares chapter 7 and chapter 13 bankruptcies.
The Biggest Difference Between Chapter 11 And Chapter 13
A business may file for chapter 11 bankruptcy. Others may file for chapter 11 such as a joint venture, an individual running a business, a LLC (limited liability company) and a partnership. There is no required income and no debt-level limit for chapter 11 bankruptcy.
Chapter 13 bankruptcy has a number of eligibility stipulations. Firstly, you must be an individual running a business or concern. You must have a stable income that is suitably large enough to cover some form of debt repayment, and there is a limit on how much debt you have. There is no minimum amount of debt, but you cannot have more than $1,140,000+/- in secured debt and/or $380,000+/- in unsecured debt. The amounts are frequently adjusted to account for current inflation levels.
All About Chapter 11 Bankruptcy
A chapter 11 bankruptcy is known as a reorganization. Chapter 11 is filed by businesses and commercial enterprises that are looking to repay their creditors, but they are looking for better terms as ordered by the courts. It is a form of bankruptcy where the debtor is still willing to repay creditors, but it is done concurrently through the courts via a court-approved plan.
A business or enterprise files for chapter 11 bankruptcy and then has 120 days to create and file a plan of reorganization. The plan/case is filed to the court and each creditor must be given a disclosure statement. This statement gives the creditors the information they need in order to evaluate the reorganization plan offered by the debtor.
It is then up to the bankruptcy court to disapprove or confirm the reorganization plan offered by the debtor. If the court approves the plan, then the debtor may repay part of any debts owed and discharge other debts. Usually, a debt has to be at least partially paid before the rest of the debt is discharged.
As part of the reorganization, the debtor may break leases or contracts that are burdensome. If the reorganization plan is approved, then the debtor may also rescale its operation in order to resume making profits, and the debtor may also recover assets.
Under chapter 11 bankruptcy, a debtor is able to go through a period of consolidation, and after that point, the debtor ends up with a reduced amount of debt and a business that has been reorganized.
All About Chapter 13 Bankruptcy
If you are an individual and you have a high income, then you may file for chapter 13 bankruptcy. It is called an, “Adjustment of Debts” and it allows a person who may be able to pay debts to somehow rearrange them so that he or she may continue to live and pay off the debts–albeit paying them off more slowly and by paying less per month.
Many businesses choose chapter 13 over chapter 11 because it allows the businesses to keep one or more valuable assets. For a business to be eligible for chapter 13, it has to be owned by just one person, which is why chapter 13 is popular with small businesses.
Most individuals (none businesses) choose chapter 13 over chapter 7 because chapter 7 requires that all of his or her assets are dissolved and he/she is left with no debt and no assets. With chapter 13 bankruptcy, an individual may be able to keep his/her house and/or a valuable asset that is worth saving.
Recapping The Debt Limit Issue
As you read earlier, there are debt limits of $1,140,000+/- in secured debt and/or $390,000+/- in unsecured debt. A trustee is usually appointed with chapter 13 bankruptcy, and some people report that the administrative side of chapter 13 bankruptcy is faster (more expedited) than chapter 7 and 11 bankruptcy.
The Glaring Difference Between Chapter 7 And Chapter 13
If you file for chapter 13 bankruptcy, then you get to keep some of your assets, which typically include property. If you stick to the plan that is laid out during your bankruptcy proceedings, then you get to keep your exempt property, but it is understood that you have to pay your creditors the value of your nonexempt property at the very least. In other words, if you want to keep your house but not your apartment, then you have to give your creditors your apartment (or the value of your apartment). With chapter 7 bankruptcy, your trustee will sell off your property and use that money to repay your creditors.
A Chapter 13 Plan Of Repayment
With chapter 13, you are allowed to come up with, and then negotiate, a plan of repayment. Usually the plan involves paying off creditors within three to five years, but since some people do not have enough income to accommodate that, they are forced to file a chapter 7 instead. The process of making a plan and paying off your debts in three to five years is not as harsh as it sounds. For example, you may be able to make a plan where you pay off most of your debt within five years by paying off what you borrowed, leaving only the interest that requires repayment, and then after five years your debt (which is mostly interest) is discharged. For example, if you borrowed $50,000 and you now owe $80,000 because interest was applied, then your chapter 13 plan may require you to pay off $50,000 over five years and the other $30,000 is discharged (it goes away) at the end of the five year period.
What some people do not know is that they may be forced into chapter 13 bankruptcy even if they file for chapter 7. If you have enough assets, or if your income is high enough, the courts may decide that you do not qualify for chapter 7 relief (this is usually decided after a means test). If you file for chapter 11 debt relief, there is little chance that you will be forced into chapter 13 debt relief because the rules are a little different for business as they are for individuals.
A confirmation hearing will decide if your plan may be confirmed or disapproved, and if it is disapproved, you will have to either negotiate or file for chapter 7 bankruptcy.
Chapter 7 Repayment – More To Know
You may file for chapter 13 and then be forced into chapter 7 for a number of reasons. The most common is because you were means tested and the court decided that you do not qualify for chapter 7 relief. Another common reason is that the debtor’s plan is not suitable (good enough) for the court to confirm (approve). A less common reason is because the debtor has filed before and/or appears to be abusing the bankruptcy process. Do note that the courts will not openly admit that abuse is the reason for a disapproval unless evidence is provided. One has to remember that the judicial judge is a person and not a cynicism-free machine. Such a judge may take a look at a petition and cynically believe it is from another deadbeat trying to give the finger to yet more creditors.
Sometimes a plan is perfectly sound in theory, but it may not conform to the Bankruptcy Code’s requirements for approval (confirmation), and is therefore denied. Another reason for a disapproval is if the debtor ran up a lot of debt just prior to filing, or if the debtor’s assets seem to have disappeared in the last five years.
Another reason is because the person filing the petition has curious account/financial activity that may make a bankruptcy a complicit ally in money laundering or some sort of fraud. For example, there was a story in 2015 where a Chinese man set up a business and ran up massive debts by losing thousands in a small casino. His company spent a year as a zombie company where it only paid the interest on debts without paying the principal. He filed for bankruptcy to free himself from the debt, and it turns out that he and a casino official were in cahoots and the Chinese man was losing the money on purpose.
A Warning Message
Other articles may advise that you seek legal help from a professional before creating your chapter 13 bankruptcy plan, which is fair enough, but allow me to remind you how many shysters are out there.
I am aware that you are strapped for cash and the last thing you want to do is start paying for legal help, but if you are genuinely planning on protecting a valuable asset such as a house, then it may be worth seeking a little help.
Be careful of bad advice that “seems” legitimate and logical. In the section below, I discuss one of the most commonly given pieces of advice that “seems” logical but is actually terrible advice.
Can You Give Away Your House Before Filing For Bankruptcy?
Many Anglo-Saxon (English Speaking) countries take much of their legal rule from British law. In fact, many US senators will see how a law works in the United Kingdom before they try it out in their own state, which is one of the reasons why online gambling is slowly becoming legalized in more and more US states.
In the UK, if you transfer the title/ownership of your house to another person prior to filing for bankruptcy, then it is seen as unfit behavior and the debtor is severely punished. The same is true if the debtor sells his or her house/asset and is then suddenly strapped for cash without being able to explain where the money went. In the US, such behavior is similarly not tolerated, and the punishments are often severe. In many cases, an application for bankruptcy is completely denied and the debtor is stuck with his or her debt. Another punishment, which is also common in British law, is to make the bankruptcy proceedings last up to 15 years, which means you have to live like a pauper for 15 years before your debts are cleared and/or a new payment plan is confirmed.
The US differs from the UK in a rather big way in that a US court will happily sue the person/company that you gave your asset away to. Even if you sold the asset, but you didn’t get the market price, they will still sue the recipient, and they are actually “MORE” likely to sue that person if that person is a relative of yours, which is not something other countries are as eager to do. Some US states say that have to declare assets you sold for more than $1000 within the last two years, but most states say five to six years because that is typically how long people hold their tax records on file.
You Have To Play Fair
If you sell an asset five years before going bankrupt, then you have to get a fair price and be able to show that you either saved the money or repaid your debts with it. If you sell an asset and the money you receive is less than its market value, then the sale may be reverted (clawed back), especially if the sale involves some sort of property or land. As mentioned earlier, a US bankruptcy court will happily sue other people and companies to retrieve the assets that you believe you stashed away, hid or moved in order to lessen your damages when you file for chapter 7 or chapter 13 bankruptcies. If you have tried to give away your assets or sell them and then gone on to either sell them for less than the market value or not declare the money, then you may be accused of actual fraud or constructive fraud–both of which carry nasty penalties.
What If I Cannot Pay All My Debts Off In Five Years?
Earlier, this article stated that you have to make a repayment plan when you file for chapter 13 bankruptcy, and if you do, then you are able to keep a valuable asset(s). The plan usually includes repaying your debts within three to five years, but obviously if you could do that, then you would have done it already…so how does that work?
A plan usually includes repaying debts over a period of three to five years. The idea is that you get to keep a valuable asset(s) such as property if you follow the plan. While the plan is in effect, the debtor is protected from creditor actions, garnishments and lawsuits. If the debtor was left to his or her own devices without a chapter 13 plan, then he or she may be unable to repay his or her debts because he or she would accrue more debt, fees and expenses without it.
Unlike with a chapter 7 bankruptcy, the debtor doesn’t receive any debt discharge right away, it only happens after the plan is completed and the debtor has repaid what his or her promised in the plan. Repayments are made under a plan that anticipates the income of the debtor during the life of the plan. Doing it that way means the debtor is able to make “affordable” payments, which is something the debtor may not be able to do if left to do it alone.
What Else Must Be Paid With A Chapter 13 Plan?
In many (but not all) cases of chapter 13 filing, the debtor is required to pay off as much of the actual debt as possible, so that the amounts discharged are mostly interest. That is what many would consider the ideal circumstance, though your case may be very different. If the creditors receive at least what they lent out, then their losses are mineralized considerably. One example may be if the debtor is in debt and 45% of the debt is interest, then the debtor is asked to pay 55% of his or her debt and the rest is discharged. Again, that is only in some cases, your filing and your plan may be very different, but the courts will try to have you pay back at least the amounts you borrowed while your plan is in effect.
The courts are going to prioritize secured claims/debts, especially if you wish to keep the assets that you secured your borrowing against. They will also prioritize child support debts, tax debts, alimony, and things of that nature. If you are filing for chapter 13 as a business, they will prioritize your commitments to staff members such as wages, commissions, to employee benefit funds and so forth.
A Chapter 13 Commonality That We Discovered While Researching
None of our echeck.org team are specialists in bankruptcy law. We have legal specialists, financial specialists, marketing specialists and so forth, but nobody who deals exclusively with bankruptcy law. Yet, during the course of our work, we have to examine cases where people and companies have gone bankrupt, and we have noticed a commonality in some of the cases.
Through my research and the research of my e-echeck.org colleagues, it is apparent that a chapter 13 discharge is broader than a chapter 7 discharge. That is to say that after the payment plan has finished, it appears that more debt is discharged in chapter 13 cases both in number and in amount.
It is easy to understand why higher amounts of debt are discharged with chapter 13 cases because one assumes that people who file for chapter 13 bankruptcy have assets that are more valuable and probably have a higher income, which typically means they are able to apply for more debt. However, we have also noticed that the number of debts discharged seems to be higher too. A simple example would be that people who file chapter 7 cases might owe money to six companies where people who file chapter 13 may owe to twelve companies. Again, the fact that a higher number of debts are discharged with chapter 13 bankruptcy is probably more do to with the type of people (in terms of demographics) who apply for chapter 13 bankruptcy vs. the type of people who apply for chapter 7. Still, it is an interesting fact that we seem to have stumbled upon through all the bankruptcy cases we have researched.
Conclusion – Chapter 7, Chapter 11 And Chapter 13
As you can see, chapter 13 bankruptcy has far more to it than chapter 7 and chapter 11 bankruptcy combined. Many individual petitioners, and many small businesses, tend to opt for chapter 13 bankruptcy, only to discover that they/he/she are not eligible or that chapter 13 is not suitable. This happens so often that at the end of the US governments page on chapter bankruptcy there is a price listed for converting your case from chapter 13 to chapter 7.
I have to conclude this article the same way that I conclude most articles about bankruptcy, which is to remind you that filing for bankruptcy requires a massive amount of thought and planning.
If you need more help and advice, then take a look at our article on How To Go Bankrupt.