Chapter 7 vs Chapter 11

The idea of filing for bankruptcy can be a difficult decision for many people. Once the decision has been made is important to decide which type of bankruptcy, you should be filing for. If you’re not eligible to file for Chapter 13 bankruptcy because you are a business owner, it’s important to understand the difference between Chapter 7 vs Chapter 11 bankruptcy. 

In the process of bankruptcies throughout the United States, it’s possible to access a fresh start with the help of a bankruptcy trustee. Under a typical bankruptcy, a bankruptcy trustee will liquidate assets to benefit creditors under Chapter 7 bankruptcy proceedings. It’s also possible to reorganize affairs for a business so that the business can continue operation while still repaying its debts, this is a Chapter 11 bankruptcy. 

A good faith effort to reorganize the business in an orderly manner comes down to a supervision task that’s taken on by a United States trustee. If you run a small business, sole proprietorship, large business or you are an individual debtor, it could be possible for you to file for Chapter 11 bankruptcy under the US bankruptcy code. 

For many small business owners and sole proprietors, a Chapter 11 bankruptcy is the perfect way to restructure and reorganize liabilities and assets so that you can continue business while also repaying your debt. If you were to file under Chapter 7, the majority of your business assets would be liquidated in order to benefit your creditors. Court approval is needed for any bankruptcy plan so Chapter 7 bankruptcy proceedings would be handled by a trustee and the same goes for Chapter 11 bankruptcy proceedings which are overseen by a trustee that oversees restructuring efforts. 

Who can file for Chapter 7 and Chapter 11

Both types of bankruptcy code will have their own eligibility requirements. Even though Chapter 11 bankruptcy is considered as a business filing for bankruptcy protection, there are a series of requirements under the bankruptcy code. 

The differences between Chapter 7 and Chapter 11

A chapter 7 case is often the final step in shutting down the business and working to restructure that business. Businesses that file under the chapter 7 process can instantly get protections from creditors under an automatic stay and these continue throughout the entire liquidation process. When a business or individual files for Chapter 7 bankruptcy, however, it won’t be possible for you to continue your operations as a business.

The big difference between Chapter 11 and Chapter 7 bankruptcy for a business is that Chapter 11 bankruptcy allows businesses to continue their operations. The Chapter 11 process is a complete reorganization and every creditor will have their own proposed plan for the debtor for repayment. Usually this means established monthly payments from the business that are distributed to every creditor. Unsecured creditors usually receive the lowest priority for payments in the bankruptcy estate, and some of the unsecured debt may even be forgiven. 

Whether you choose to file for Chapter 7 or Chapter 13 bankruptcy, it is possible to get rid of thousands of dollars in debts which are unsecured. This often occurs in a fairly short period of time without I need to commit disposable income to repayment. A creditors claim is typically only paid if there is no non-exempt property that the trustee can sell off. Most individuals are able to protect their personal belongings, but there are some cases where a luxury vehicle or vacation property may be sold off in order to handle debts under Chapter 7. 

Chapter 11 bankruptcy will ensure that financial affairs can be reorganized in a proper bankruptcy plan. Chapter 11 bankruptcy is usually able to decide a much larger bankruptcy case. In complicated and expensive bankruptcy cases that involve corporations, Chapter 11 bankruptcy is often wise. In an individual filing, a Chapter 11 bankruptcy may also be advantageous if there is a person that faces too much debt to qualify for Chapter 13 bankruptcy. 

How creditors are paid in Chapter 11 versus Chapter 7

Chapter 7 cases do not pay creditors back and a large portion of the debt will be absolved. When property and assets are sold off, creditors will receive a share of the money and the rest of the debt will be forgiven. Under Chapter 11, different classes of creditors are paid in different ways to the bankruptcy plan and there are routine payments which are given to creditors after filing and handling the re-organization efforts. 

Property effects

Under Chapter 7 bankruptcy, complete liquidation often occurs. Nonexempt equity in property may be lost under a Chapter 7 case. A no asset case means that debtors will keep all of their assets and get rid of their substantial debts. If a business filed under Chapter 7, it will close its doors. The rest of the business assets will be sold to pay off unsecured creditors. 

Under Chapter 11 case aspects of property can be secured or sold. Holding liens may also be placed on secured assets to ensure that the company or individual will continue their debt repayment plan. A property with a lien on it can be considered collateral, and this lien will ensure that if the conditions of the repayment plan are not met, a trustee can sell that asset in order to repay debts. 

If you’d like to learn more about the process of Chapter 11 and Chapter 7 bankruptcy or determine which path would be the best for your needs, contact us today