Differences Between Chapter 13 Bankruptcy and Chapter 11 For
Massachusetts Small Businesses
For a small business in financial distress, bankruptcy may be the only viable option. There are two restructuring options under bankruptcy law for debtors who want to try to stay in business: Chapter 11 and Chapter 13. For a “straight” or “liquidation” bankruptcy, see Chapter 7 Bankruptcy for Small Business Owners.
To some extent, Chapters 11 and 13 are similar. Both types of bankruptcy allow debtors to continue in business and propose plans to restructure their finances. Subject to legal requirements and limitations, a Chapter 11 or 13 plan can:
- allow you to retain property needed to operate your business
- give you time to sell assets you no longer need or cannot afford to keep
- modify payment terms on secured debts (like real property mortgages or equipment loans), and
- discharge (or in other words, eliminate) obligations that you cannot pay over the plan term.
Most small business owners, when possible, choose Chapter 13 over Chapter 11. Chapter 11 can provide more flexibility, but it usually costs too much money and takes too much time to be a realistic option for small business owners. (To learn about these types of bankruptcy, see Chapter 13 Bankruptcy for Small Businesses, and Chapter 11 Bankruptcy: An Overview.)
Eligibility for Chapter 11 or Chapter 13 Bankruptcy
Virtually anyone can file for Chapter 11 bankruptcy, whereas many small businesses are ineligible to file for Chapter 13.
Chapter 13 Eligibility
Chapter 13 is available only to individuals with regular income. If you operate your business as a sole proprietorship, you can take advantage of Chapter 13 by filing a petition on your own behalf. Otherwise, Chapter 13 is not an option you can choose. Small businesses operated through corporations, partnerships, or other entities are not eligible to seek Chapter 13 relief.
Chapter 13 is also subject to debt limitations, which change periodically. Currently, eligibility for Chapter 13 is limited to individuals who owe no more than $383,175 in unsecured debt and $1,149,525 in secured debt. Unsecured debts are obligations that are not backed by collateral, such as medical bills and credit card claims. Examples of secured debts are home mortgages and car loans. Individuals cannot file for relief under Chapter 13 if they owe more than the specified debt limits.
(Learn more about eligibility for Chapter 13 bankruptcy.)