Chapter 11 vs Chapter 13: 7 Differences for a Sole Proprietor

If your small business is a sole proprietorship, then you and the business are legally the same. And if your debts are under $526,700 unsecured and $1,580,125 secured, you’re good for Chapter 13 bankruptcy -- with regular income. But if your debts are bigger, a Subchapter V (small-business reorganization plan under Chapter 11) might work. In that case, your total debts, secured and unsecured, could be as high as $3,424,000. There are seven key differences between 11 and 13 -- not as simple as you think.

The name of the game is regular income. You can’t file Chapter 13 without a stable source of income. You need enough income to fund a multiyear repayment plan to your creditors. If you’re looking to file Chapter 13, then your business and personal debts can’t add up to more than certain amounts. The Bankruptcy Code has a set of debt limits for both secured and unsecured debts. Those amounts are adjusted for inflation every three years. These limits are effective for cases filed from April 1, 2025 to March 31, 2028.

What if your debts are too big for a Chapter 13 bankruptcy? That doesn’t necessarily mean you can’t use bankruptcy to sort out your debts. You might be able to use a small-business reorganization plan to save your business. The Small Business Reorganization Act of 2019 added Subchapter V as an alternative to the standard Chapter 11 bankruptcy process for businesses. It streamlines the process to avoid the paper-heavy and costly regular Chapter 11 proceedings that were originally built for corporate giants.

First, there are significant differences in debt caps. Chapter 13 has separate caps for secured and unsecured debts. To file that chapter, you must be under both limits. Subchapter V has one combined limit on total debt of $3,424,000, and the debtor must be engaged in business activity. The small business reorganization plan cap was temporarily set at $7.5 million, but this increase expired on June 21, 2024.

Second, a Chapter 13 plan lasts anywhere from three to five years. You can’t go more than five years. If the debtor’s income is below the state median, then usually it is three years.

Third, a debtor under Subchapter V writes a plan within 90 days of filing for bankruptcy. They’re the only one who can file a plan. But in a regular Chapter 11 case, creditors can file competing plans after 120 days from the date of the filing.

Fourth, there are differences in creditor votes. Under the standard Chapter 11 rules, all creditors who are impacted by the proposed plan -- called “impaired creditors” -- get to vote on it. Each class of claims gets counted separately. If the plan is accepted by at least two-thirds of the amount of claims in an impaired class of claims and by more than half of the number of creditors voting in that class, the class accepts it. In a Subchapter V case, generally there is no creditors’ committee. And usually the owner doesn’t have to get votes. Subchapter V drops another rule called the “absolute-priority rule.” That rule usually says that the owner has to pay back all creditors before they can keep any ownership in the business. With a Subchapter V, however, the owner can keep ownership of the business even if the creditors aren’t paid in full, if the plan is fair and equitable and all of the owner’s disposable income is committed to the plan.

The fifth difference is who gets a trustee and who doesn’t. Every Chapter 13 case gets a trustee, called the “Chapter 13 trustee.” So do all Subchapter V cases. But in a regular Chapter 11 case, the owner usually gets to run the business as a debtor-in-possession.

The sixth difference is in costs. Subchapter V bankruptcies usually cost less than standard Chapter 11 cases, because the documentation is much simpler. The current filing fee in a Chapter 11 case is $1,738 ($1,167 initial filing fee plus $571 for the administrative fee). And in a standard Chapter 11 case, there’s also a ton of paperwork. The regular Chapter 11 debtor needs to prepare a detailed disclosure statement. With Subchapter V, the law drops the disclosure statement requirement unless the court requires one.

The seventh difference is the proof you have to show. In Chapter 13, you need to show six months’ worth of earnings to satisfy the bankruptcy court that you have the means to maintain your plan. And in exchange for no loss of assets, in a Chapter 13 plan you have to repay a portion of debts.

Despite these differences, both Chapter 11 and 13 bankruptcies trigger a powerful legal shield. The moment you file, the automatic stay kicks in. The stay stops creditors dead in their tracks, and they can’t take action to collect debts or enforce judgments. In both Chapter 13 and Subchapter V, the small-business debtor has to assume or reject a commercial lease. When you reject the lease, it becomes an unsecured claim and is folded into your bankruptcy plan. In a Chapter 13 or Subchapter V bankruptcy, taxes you withhold on sales and payroll are usually not dischargeable. Those taxes are called trust fund taxes, and the IRS and state can come after you personally.

Neither Chapter 13 nor Subchapter V Might Fit

If the business is too far underwater and there’s no realistic way to repay, neither Chapter 13 nor Subchapter V might fit. A Chapter 7 would sell off your business assets, and the business would have to close. But Chapter 13 and Chapter 11 reorganizations generally allow you to keep operating your business.

So what should you do? Always figure out if you’re under the Chapter 13 debt limits first. If your debts are below both of the Chapter 13 limits, that chapter often is your best fit. However, if your debts are over the Chapter 13 limits, you might want to consider a Subchapter V.