Chapter 13 vs Chapter 11 vs Chapter 11 “Small Business”

In general, most people filing, or interested in filing, bankruptcy as a small business owner would likely choose between Chapter 13 and Chapter 11. Chapter 7 bankruptcy is usually not a welcome option for the sole proprietor. The main reason is that Chapter 7 bankruptcy would likely require that the business be shut down. With that said, most business owners would prefer the relative simplicity and ease of a Chapter 13 case rather than the complexity of Chapter 11. Additionally, the higher cost of Chapter 11 usually creates an additional incentive to utilize the benefits of Chapter 13. However, for some business owners, particularly those looking to adjust secured debts, Chapter 11 may be the best option, even with the added cost. Lastly, the creation of the “small business” Chapter 11 can help those business owners with limited liabilities with a streamlined process.

Eligibility for each Chapter

Chapter 13

To be eligible to file for bankruptcy under Chapter 13, the individual must have “regular income.” This requirement means that the debtor maintains sufficient income to make payments under the Chapter 13 plan. In addition, the Bankruptcy Code limits a Chapter 13 debtor to unsecured debts of $360,475 and secured debts of $1,081,400. Should the individual’s debts fall outside this level, the debtor must file for Chapter 11. This debt level limitation is equally applicable in cases of joint (married) debtors.

Chapter 11

In general, any “person” who may be a debtor under Chapter 7 may also be a debtor under Chapter 11. Although most people think of the various, large corporate cases, Chapter 11 can also be used for small businesses, sole proprietorships, and individuals. A husband and wife may also be eligible to file a joint Chapter 11 petition.

Small Business Chapter 11

Recognizing that many small business owners do not qualify for Chapter 13, but want to be able to reorganize such small business debts, the Bankruptcy Code now allows for streamlined procedures in Chapter 11 for certain business entities. A small business, for Chapter 11 purposes, is a person or business engaged in commercial or business activities whose total debts do not exceed $2,343,300. This designation of a “small business” must be stated in the initial bankruptcy petition.

Benefits of Each Chapter

Chapter 13

Overall, Chapter 13 gives the individual debtors, including small business owners, the same opportunity to reorganize their debts that large business have under Chapter 11. However, this reorganization is completed through a less complex and expensive procedure. As with Chapters 7 and 11, all debtors that file for Chapter 13 bankruptcy are afforded the benefit of the automatic stay. This stay prevents any collection, foreclosure, lawsuit, or garnishment activity against the Chapter 13 debtor. While the Chapter 13 debtor must file a reorganization plan, it is only the debtor that may propose and create the debt repayment plan.

Also, in Chapter 13, like Chapter 11, the individual debtor maintains possession and control of any business interests. As such, the debtor has the exclusive right to sell, lease or otherwise use business assets, as long as such actions are in the normal course of business operations.

Unlike Chapter 11, in Chapter 13 a creditors’ committee is not appointed. Also, the plan does not require that any creditor consent to the reorganization plan in Chapter 13.

Many individuals are attracted to Chapter 13, if not forced out of a Chapter 7 because of a failed means test, because of the ability to alter secured debt. For example, a car loan can be altered if the borrower is behind on the car payments to allow for (1) repayment of past payments owed and (2) restructuring the loan to conform to market value even when the loan balance far exceeds the true value of the car. Similarly, on home loans, Chapter 13 allows the debtor to make up past due payments over the term of the plan (3-5 years). However, in Chapter 13, like Chapter 11, a debtor cannot adjust the terms of a loan secured by the debtor’s principal residence. As to non-primary-residence property, the Chapter 13 plan can restructure the debt so long as full payment is made within the plan period (3-5 years).

As to claims, unlike Chapter 11, a Chapter 13 debtor does not have to obtain approval from its creditors to approve a plan. The debtor simply has to provide a plan that the court approves.

Chapter 11

In Chapter 11, a sole proprietor is able to continue business operations, and run the business as previously done. The debtor is able to obtain financing, sell assets, lease property, and do all that the business normally would do, but for the bankruptcy. While Chapter 11 can be quite expensive due to the extensive reporting, filings, and other procedural matters involved, one real benefit unavailable to Chapters 7 and 13 debtors is that secured debt can be adjusted extensively. For example, a rental property that that has a principal balance far below the current market value (quite common in this economy) can be adjusted to conform to that market value. The payment terms do not have to fall within a 3-5 year plan window. Again, while Chapter 11 can be expensive, this simple ability to adjust non-primary-residence secured debt may be worth the additional expense.

Small Business Chapter 11

The benefits of the “small business” Chapter 11 is strictly procedural. Congress has simplified the procedure to allow for companies that are not Blockbuster or GM to partake in all the benefits of Chapter 11. The advantages include a simplified plan form for most courts, not requiring a committee of creditors in most cases, a shortened monthly operating report, and an extended exclusivity period to file a plan (180 days vs. 120 days).


In most bankruptcy cases where an individual business owner is considering whether to file a Chapter 13 or Chapter 11, the decision is clear. Chapter 13 will be most beneficial due to the increased costs and procedures of Chapter 11. However, in cases of a qualified “small business” with real property outside of a principal residence, the small business Chapter 11 may be a benefit that can save the business owner substantial money over the course of the bankruptcy and in the future.

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