Bankruptcy Information Center

Chapter 11 and 13 Bankruptcies

Most publicly and closely held companies choose to file bankruptcy under either Chapter 11 or 13. Under both, the company can continue to transact business, does not have to sell off assets, and in some cases may still qualify to have their securities traded publicly. The primary difference between Chapter 13 and Chapter 11 bankruptcies is the debt amount qualification. To qualify for Chapter 13 bankruptcy, the debtor must have either less than $871,550 in secured debt (real estate, home, car) or less than $269, 250 in unsecured debt (most credit cards). The next difference is the greater complexity of the proposed repayment plan in a Chapter 11 filing. The complexity stems from the fact that the debt may be much greater than in a Chapter 13 filing and the company may be a much larger entity with publicly traded securities and many different operating divisions.

Once a bankruptcy petition has been filed an automatic stay is in effect. This means that collection efforts by creditors stop in order to allow the judicial process begin. For collection efforts to renew there must be a judicial order to do so.

When a business files under Chapters 11 or 13 it can still operate, transact business and function as a company. However, there first must be a proceeding in a Federal Bankruptcy court that initially assigns a trustee, effectively an arm of the court that administers and supervises the bankruptcy. A bankruptcy petition is filed along with a proposed payment plan. The proposed payment plan touches all aspects of the company functioning while under the jurisdiction of the bankruptcy court. In addition, the proposed payment plan requires that its value be equal to what it would have been had the company and its assets been liquidated under a Chapter 7 filing. The plan must also include assets and income from all sources and all foreseeable expenses. During the repayment period the company can keep all assets.

During the initial stages of filing there may be objections to the plan by either the trustee or a creditor, but the judge has final authority over the plan. The judge can change, alter, or keep intact the repayment plan. However, the trustee assigned to the case is a judicial officer, assigned the task of reviewing and supervising a "good faith" effort by the debtor to repay debt. Therefore, the opinion of the trustee will hold a considerable amount of weight with the presiding judge. The trustee also provides an investigative function. The assets and expenses disclosed by the debtor are open to investigation by the trustee. In the end, the plan must represent a full satisfaction of the debt and all income over a three-year period. This is disposable income after taxes.

Under Chapter 13 (and Chapter 11), the period given for repayment is three years. In some cases this can be extended to five years with judicial permission.