How Does Chapter 11 Bankruptcy Differ From Chapter 12?

If you own a small business and you are considering the possibility of filing for a reorganization bankruptcy, you might be wondering about the differences between Chapter 11 and Chapter 12 bankruptcy. You may know that both types of bankruptcy are intended for certain small business owners, and that both types of bankruptcy allow debtors to reorganize their debts so that they can continue operating their companies. Yet it is critical to understand that Chapter 12 bankruptcy is a very specific type of bankruptcy that is only for a very small category of business owners. Our West Palm Beach bankruptcy lawyers can tell you more about reorganization bankruptcy for businesses, and we can explain the key differences between Chapter 11 and Chapter 12 bankruptcy.

Types of Reorganization Bankruptcies 

There are several kinds of reorganization bankruptcy under the U.S. Bankruptcy Code, including Chapter 11 and Chapter 12. You should know that Chapter 13 is also a type of reorganization bankruptcy, but it is only designed for individual or consumer filers as opposed to business filers. As such, the only type of business structure that can file for Chapter 13 bankruptcy is a sole proprietorship since the business and the owner are the same legal entity.

Chapter 11 and Chapter 12 bankruptcy are both used commonly for businesses, although Chapter 11 can also be filed by an individual consumer when that consumer does not meet eligibility requirements under Chapter 13 because of a high debt load. Then, you might also have heard of a type of reorganization bankruptcy known as “Subchapter V.” This is a specific type of bankruptcy filing within Chapter 11, and it is specifically designed for small business owners.

Chapter 11 and Chapter 12 Bankruptcy 

As we noted above, Chapter 11 is a broad type of reorganization bankruptcy that can be filed by businesses or individuals, and there are no debt limits that prevent businesses with very high amounts of debt from filing for Chapter 11. According to the Cornell Legal Information Institute (LII), the primary goal of Chapter 11 bankruptcy is “to create a viable economic entity by reorganizing the debtor’s debt structure.” Generally speaking, Chapter 11 is on the expensive side when it comes to bankruptcy filings, and it is much more complex than the other types of reorganization bankruptcy discussed above.

Chapter 12 is one type of reorganization bankruptcy, but it is only available to “family farmers” or “family fisherman” with a “regular annual income.” Accordingly, if your business cannot be classified within the categories of either “family farmers” or “family fishermen,” you cannot file for Chapter 12 bankruptcy. Chapter 12 is simplified from Chapter 11 and is more streamlined. In some ways, it is similar to Subchapter V, but it is specifically designed for these limited types of businesses.

Contact a West Palm Beach Reorganization Bankruptcy Attorney

 If you are a business that is considering reorganization bankruptcy but you do not qualify for Chapter 12, you could still be eligible for a simplified process under Subchapter V. One of the experienced West Palm Beach reorganization bankruptcy lawyers at Kelley Kaplan & Eller can evaluate your circumstances today and provide you with more information about your options.

Sources:

law.cornell.edu/uscode/text/11

law.cornell.edu/wex/chapter_11_bankruptcy#:~:text=Chapter%2011%20bankruptcy%20is%20the,United%20States%20Trustee

uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics#:~:text=Chapter%2012%20is%20designed%20for,or%20part%20of%20their%20debts