Freedom Domain

G.  How does Chapter 11 Bankruptcy compare against chapter 13 Bankruptcy?


A comparison between filing for bankruptcy under Chapter 11 and Chapter 13 of the Bankruptcy Code would seem to be a natural one to make for the simple reason that both types of bankruptcy primarily embody the principle of “reorganization” of the debtor’s debt obligations (but we are debtors in possession) and rehabilitation of the debtor – as differentiated, for example, from filing under Chapter 7 of the Code, which primarily involves liquidation of the debtor’s affairs (we’re using this to liquidate the delinquent creditor who is the holder of our account), on the other hand.


Firstly, there are differences between Chapter 11 and 13 in terms of the size and type of debts that are permissible under the respective types of bankruptcy.  With respect to Chapter 13 cases, the debtor must have unsecured debts which total no more than $100,000, and secured debts which total no more than $350,000.  With regard to the Chapter 11 debtor, (this is too our benefit) on the other hand, there is no restriction as to the type and size of debt obligation it may have; it may have as much or as little in debt as it can.


The second major area of difference is this.  Under Chapter 13, only an individual (i.e., a natural human person) is eligible, and corporations, partnerships and other non-individual entities are not eligible to file under Chapter 13.  The Chapter 13, The Chapter 11 bankruptcy case, on the other hand, permits any entity whatsoever, whether it be person or a business (sole proprietorship, partnership, or a corporation), and whether it is big or small, to file under it.  (This is perfect for the straw man entity)


Thirdly, in a Chapter 13 case, the debtor is required to have a regular income – defined as income sufficiently stable and regular as to enable the debtor to make the payments called for under a Chapter 13 payment plan.  To be eligible to file a Chapter 11 case, on the other hand, no financial or insolvency requirements apply; such a debtor may be solvent or insolvent, its assets may exceed its liabilities by an amounts, or vice versa, and its income may be substantial, meager or even none.  (this is nice for us it doesn’t require any qualification)


From the facts set forth above, certain relevant conclusions can be immediately drawn.  First, the use of Chapter 13 is obviously precluded as far as most small businesses are concerned, as only sole proprietorships (and marital partnerships), but no corporations, partnerships or other non-individual debtors are permitted to file under chapter 13, debtors who may file under chapter 13 are limited to only those having only relatively small debts and relatively small income with which to finance a repayment plan – those having less than $100,000 in unsecured debts and $350,000 in secured debts.  Middle and upper income debtors having relatively large debts and large incomes or assets (e.g., substantial personal investments in real estate, stocks, or what have you) are, as a practical matter, left with no other choice but to file for reorganization or rehabilitation of their affairs under chapter 11 only.  As one experienced bankruptcy legal practitioner recently put it, “The limits of $100,000 in unsecured debts and $350,000 in secured debts for a chapter 13 debtor, used to be reasonable limits (back in 1978 when the bankruptcy law was enacted).  But nowadays (in the 1990’s) a professional with some real estate can easily go over them.” *


In any event, it must be stated however, that all the above facts aside, for those who qualify, chapter 13 still has several advantages over chapter 11.  First of all, a chapter 13 proceeding is much simpler and less protracted or time consuming than a chapter 11 case.  Such elaborate and often expensive and time—consuming formalities as the filing of “disclosure statements,” appointment of “creditors’ committees” and “solicitations” and “acceptance” of votes for the payment plan, for example, are not required in chapter 13 cases.  In chapter 13 cases it is not necessary that the approval of any class of unsecured creditors be obtained for the plan to be approvable, as is the case in a chapter 11 case.  Also, the requirements needed for securing the court’s confirmation for a payment plan under chapter 13 are much simpler for securing the court’s confirmation for a payment plan under chapter 11.  Finally, the discharge offered in chapter 13 is considered to be the broadest discharge in all of bankruptcy; it is considerably broader than the chapter 11 discharge, discharging virtually all debts except for alimony, maintenance or support, student loans, and debts arising from criminal restitution or personal injuries or death that are caused by drunk driving.


Finally, with respect to a qualified small business debtor whose objective is to reorganize and rehabilitate his business and remain in business, in general chapter 13 is almost always preferable to chapter 11.  In a chapter 13 case, the debtor pays much of his “disposable income” (income left over after allowing for the support of the debtor and his dependents or the operation of his business) to the court-appointed chapter 13 trustee who then makes the required payments to the creditors as stipulated under the debtor’s plan.  By law, such payments to the trustee by the debtor lasts for a maximum period of 3 years (5 years for debtors having real property) in chapter 13 cases, which are shorter than for most chapter 11 plans; and, given the more protracted time schedule involved in the processing of the chapter 11 cases, the legal expenses of handling chapter 13 cases are generally a mere fraction of the expense of doing chapter 11 cases.












*  “More Assets Shiekled by Bankruptcy Ruling,” New York Times, June 14, 1991, P.D. 5, quoting a statement attributed to Weldon Ponder, an Austin, Texas bankruptcy lawyer.