The difference between Chapter 11 and Chapter 7 Bankruptcy

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For most people, bankruptcy is a harrowing experience. People file for bankruptcy when their financial situation takes a turn for the worst. Most people would rather avoid the process altogether. But it has its advantages. To be more specific, it has tools that people can use to escape crushing debt.

But the term ‘bankruptcy’ is quite broad. It doesn’t mean the same thing in every single situation. For instance, there is a difference between chapter 7 and chapter 11 bankruptcy. You shouldn’t file for bankruptcy without first understanding the difference between the two.

They tend to overlap in some areas. But they differ drastically in others. To identify the best option for your situation, you have to first understand what each chapter has to offer:

1). Chapter 7 Bankruptcy

Chapter 7 bankruptcy has an element of finality to it. They call it liquidation bankruptcy because it is associated with companies that can’t be saved. Once you file for chapter 7 bankruptcy, steps will be taken to sell your non-exempt assets to clear your debts.

An appointed trustee will oversee the sale of your assets. They will also ensure that creditors with secured debts are paid first. Secured debts are loans that are attached to collateral. Once creditors with secured debts are cleared, any funds that remain will pay creditors with unsecured debts.

chapter 11 bankruptcy

2). Chapter 11 Bankruptcy

They call this reorganization bankruptcy. Under this category, the objective isn’t to immediately clear your debts. Rather, the company in question is expected to reorganize their debts by engaging with creditors and negotiating new repayment plans on loans.

Once all is said and done, the company in question will continue to operate. It will also pay all its debts according to the repayment plans it has agreed with the creditors. Chapter 11 bankruptcy can be filed by a company or its creditors. In other words, it can be voluntary or involuntary.

Now that you know what constitutes chapter 11 and 7 bankruptcy, it is time to look at the major differences between the two. They include:

1). If you’ve ever wondered about the sort of people that can file for chapter 11 or 7 bankruptcy, there is no specific restriction. Any individual or company can file for either chapter if they meet the basic requirements. However, chapter 7 is typically favored by individuals and small businesses. On the other hand, big companies are drawn to chapter 11.

Of the two, it is more complex because the company in question has to undergo a shakeup. Chapter 11 is also more expensive.

2). As was noted above, chapter 11 and 7 bankruptcy have different goals. Chapter 7 destroys the business in question. It allows them to quickly clear their debts by selling their business assets. It also protects the personal assets of the individuals involved. It provides the sort of relief that so many businesses and companies desire.

However, the business cannot continue operating. Chapter 11, on the other hand, is designed to find a way to allow a business to keep running. Companies will create plans that they believe will resolve their financial struggles in the long term.

They must present those plans to a court that will either approve or reject them. Chapter 11 is expensive because it is normally used to tackle massive cases that involve larger organizations.

3). Creditors tend to fair better with chapter 11 bankruptcy. Chapter 7 is designed to clear all your debts. A trustee will sell your assets to clear your secured debts. Some unsecured creditors might receive a share of this money. But if the money isn’t enough to clear all the unsecured creditors, they have to accept their losses. Any debts that were not paid are forgiven once all your assets have been sold.

Chapter 11 bankruptcy is more rigid. You are still expected to repay your debts. Chapter 11 merely gives you the option of renegotiating your terms with your creditors.

4). One of the most significant aspects of chapter 11 and 7 bankruptcy is the manner in which property is treated. With chapter 7, you will lose your business assets. They will be sold to pay your debts. But this doesn’t necessarily matter in the short term because filing for chapter 7 leads to the closure of your business. As such, the fact that you have to sell your business assets doesn’t make much of a difference at that point.

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Chapter 11 allows you to keep your business assets. Though, you can choose to leave them in the hands of a secured creditor with a lien. Either way, your property is safer with chapter 11.

5). As far as time is concerned, chapter 11 takes longer. You are looking at several years in some cases. Chapter 7, on the other hand, takes just a few months for people and a year or two for companies. As was noted before, it is simpler and less complicated because the organization in question has to close its doors.

Chapter 11 bankruptcy has to take longer because the business isn’t closing despite the weight of its debt. Rather, it has to reorganize before commencing with its operations.

6). Both chapter 7 and 11 cases start the same way. You have to file bankruptcy forms in each case. These forms are quite similar, though chapter 11 cases have additional forms. You have to attend a meeting of creditors in both cases. But it isn’t commonplace for chapter 7 cases to have additional court hearings after this. Chapter 11 debtors are not so lucky. Their process is interspersed with several court hearings.

7). When you file for chapter 7 bankruptcy, a trustee takes over. They will oversee the closure of the business. Sometimes, a trustee will keep the business in operation, at least for a time to make money that can be used to pay creditors. With chapter 11, the business owner remains in control because trustees are typically not involved in this process.

The business owners are expected to propose a reorganization plan. Creditors can also file a competing plan. Unsecured creditors can collaborate to ensure that the bankruptcy plan that is eventually submitted suits their interests. The court will approve the plan that favors the creditors.

Of all the differences listed above, the biggest one concerns the debt. Chapter 7 forgives the debt. Chapter 11 does not.