Business Bankruptcy Options: Chapter 11 or Chapter 13

Chapter 11 and Chapter 13 are two different types of bankruptcy filings under the United States Bankruptcy Code, and they are generally used for different purposes. Here's a brief overview of each and why a business might choose one over the other:

1. Chapter 11 Bankruptcy:
   • Purpose: Chapter 11 is primarily designed for businesses, including corporations and partnerships, to reorganize and continue their operations while restructuring their debts.
   • Flexibility: It offers more flexibility compared to Chapter 13, making it suitable for larger businesses with complex financial structures.
   • Debt Restructuring: In Chapter 11, the business creates a plan to reorganize its debts, often negotiating with creditors to modify payment terms, reduce debt amounts, or extend repayment periods.
   • Operational Control: The existing management usually retains control of the day-to-day operations of the business during the restructuring process.
2. Chapter 13 Bankruptcy:
   • Purpose: Chapter 13 is generally used by individuals (including sole proprietors) with regular income to develop a plan to repay all or part of their debts over three to five years.
   • Debt Repayment Plan: Individuals propose a repayment plan to the court, and they must use their future income to pay off creditors according to the plan.
   • Limited Business Use: Chapter 13 is not typically used for large businesses. However, a small business owner might consider it if their business debts are intertwined with personal debts and they meet the eligibility criteria.
   • Simplified Process: Chapter 13 is generally less complex and expensive compared to Chapter 11, making it more accessible for individuals.

Factors influencing the choice:

• Size and Complexity: Larger businesses with more complex financial structures may opt for Chapter 11 due to its flexibility and suitability for reorganization.
• Control and Management: Chapter 11 allows existing management to retain control, which may be important for businesses aiming to continue operations without significant disruptions.
• Debt Levels: The amount and nature of debts can influence the choice. Chapter 11 is often chosen when dealing with substantial debt levels that require a comprehensive restructuring plan.

Ultimately, the choice between Chapter 11 and Chapter 13 depends on the specific circumstances of the business, its financial situation, and the goals of the owners or management. Legal and financial professionals should be consulted to determine the most appropriate course of action. Since 1999, the Law Offices of David A. Arietta has provided comprehensive legal representation for consumers and businesses in the areas of bankruptcy, estate planning, probate, and trust administration. David protects your assets, your family, and your business. (925) 472-8000 Our main office is conveniently located in downtown Walnut Creek with the ability to serve clients throughout the San Francisco Bay Area and Northern California.