Chapter 11 Bankruptcy vs. Chapter 7 Bankruptcy: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on March 1, 2024
Chapter 11 bankruptcy allows businesses to restructure debts and remain operational, while Chapter 7 involves liquidating assets to pay off debts and often leads to business closure.
Key Differences
Chapter 11 bankruptcy and Chapter 7 bankruptcy serve different purposes and are suited for different financial situations. Chapter 11 bankruptcy, often referred to as a reorganization bankruptcy, is primarily used by businesses allowing them to continue operations while restructuring their debts. This process is complex and involves proposing a plan of reorganization to keep the business alive and pay creditors over time. Chapter 7 bankruptcy, known as liquidation bankruptcy, is more straightforward and can be used by both individuals and businesses. In Chapter 7, a trustee is appointed to liquidate non-exempt assets to pay off creditors, and the process usually results in the dissolution of the business.
The cost and duration of Chapter 11 bankruptcy can be significantly higher and longer than Chapter 7. Chapter 11 involves detailed reorganization plans, negotiations with creditors, and court approvals, making it a lengthy and costly process. Chapter 7 bankruptcy, on the other hand, is generally quicker and less expensive, with most cases being resolved within a few months. This makes Chapter 7 a more attractive option for individuals and small businesses seeking a fresh start.
Eligibility for Chapter 11 and Chapter 7 bankruptcy also differs. While Chapter 11 is available to both businesses and individuals (though it's more commonly associated with businesses), Chapter 7 is available to individuals, partnerships, corporations, and other business entities. However, individuals filing for Chapter 7 must pass a means test to qualify, which is not required for Chapter 11.
The outcomes of Chapter 11 and Chapter 7 bankruptcies vary significantly. Chapter 11 aims to restructure and reduce the debtor's obligations, allowing the business to emerge stronger and continue operations. Conversely, Chapter 7 typically results in the liquidation of the debtor's assets and the cessation of business operations, offering a clean slate but often at the cost of the business's survival.
Chapter 11 bankruptcy provides a pathway for businesses to recover from financial distress by restructuring their debts, whereas Chapter 7 bankruptcy offers a way to discharge debts through asset liquidation, which can lead to the end of business operations. Both types of bankruptcy have their places in the legal framework, providing different solutions based on the debtor's specific circumstances and objectives.
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Comparison Chart
Purpose
Reorganization and restructuring of debts for businesses
Liquidation of assets to pay off debts
Typical Users
Businesses and some individuals
Individuals and businesses
Process
Complex, involving a reorganization plan
Relatively simple, involves liquidating assets
Outcome
Business continues operating, debts restructured
Business often dissolves, assets liquidated
Duration and Cost
Lengthy and costly due to complexity
Shorter and less costly
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Eligibility
Available to businesses and individuals
Means test required for individuals
Chapter 11 Bankruptcy and Chapter 7 Bankruptcy Definitions
Chapter 11 Bankruptcy
Debts are restructured, not eliminated.
Chapter 11 bankruptcy helped the company restructure its massive debts.
Chapter 7 Bankruptcy
It offers a clean slate by discharging debts.
Chapter 7 bankruptcy allowed him to discharge most of his unsecured debts.
Chapter 11 Bankruptcy
Chapter 11 can be costly and complex.
Due to its complexity, the Chapter 11 bankruptcy process drained the company's remaining resources.
Chapter 7 Bankruptcy
Chapter 7 is a quicker process than Chapter 11.
The Chapter 7 bankruptcy was completed within six months, providing a fresh start.
Chapter 11 Bankruptcy
It involves creating a reorganization plan.
Under Chapter 11 bankruptcy, the company proposed a reorganization plan to pay back creditors.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves liquidating assets to pay off debts.
After filing for Chapter 7 bankruptcy, the business's assets were liquidated.
Chapter 11 Bankruptcy
It aims to keep the business operational.
Filing for Chapter 11 bankruptcy was a strategic move to keep the doors open.
Chapter 7 Bankruptcy
It can lead to the dissolution of a business.
The small shop had to close permanently after the Chapter 7 bankruptcy proceedings.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows a business to reorganize its debts.
The company filed for Chapter 11 bankruptcy to avoid going out of business.
Chapter 7 Bankruptcy
Individuals must pass a means test to file.
She qualified for Chapter 7 bankruptcy after passing the means test.
FAQs
What is Chapter 11 bankruptcy?
Chapter 11 bankruptcy is a form of bankruptcy that involves the reorganization of a debtor's business affairs, debts, and assets. It's primarily for corporations but can also apply to individuals.
Who can file for Chapter 11 bankruptcy?
Both businesses and individuals can file for Chapter 11 bankruptcy, though it's most commonly used by corporations.
What is a "debtor in possession"?
A "debtor in possession" is a debtor who keeps possession and control of assets while undergoing reorganization under Chapter 11, without the appointment of a case trustee.
What are the costs of filing for Chapter 11?
Chapter 11 bankruptcy involves substantial filing fees and administrative costs, as well as attorney fees, which can be significant due to the complexity of the case.
How long does Chapter 11 bankruptcy take?
The process can vary greatly, from a few months to several years, depending on the complexity of the case.
How does Chapter 11 bankruptcy work?
The debtor remains in control of their operations as a "debtor in possession" but must get the bankruptcy court's approval for major decisions. A plan of reorganization is proposed to keep the business alive and pay creditors over time.
Can a company operate during Chapter 11 proceedings?
Yes, companies generally continue to operate while they reorganize their debts under Chapter 11.
What happens to stock during Chapter 11 bankruptcy?
The company's stock can continue to trade, but shareholders may lose value or be wiped out depending on the reorganization plan's outcome.
How does Chapter 7 bankruptcy work?
A trustee is appointed to liquidate the debtor's non-exempt assets to pay off creditors. After liquidation, most remaining debts are discharged.
Who can file for Chapter 7 bankruptcy?
Both individuals and businesses facing insolvency can file for Chapter 7 bankruptcy.
Can Chapter 11 be converted to another form of bankruptcy?
Yes, Chapter 11 cases can be converted to Chapter 7 (liquidation) if reorganization fails or is deemed infeasible.
Will filing for Chapter 7 ruin my credit?
Chapter 7 bankruptcy will negatively impact your credit score and remain on your credit report for 10 years, but rebuilding credit can start immediately after discharge.
What is a reorganization plan?
A reorganization plan outlines how the debtor will repay creditors over time, which must be approved by the bankruptcy court.
Can all debts be discharged in Chapter 7?
No, certain types of debts such as alimony, child support, certain taxes, and student loans are generally not dischargeable.
Can businesses discharge debts in Chapter 7?
Businesses can liquidate assets to pay off debts, but unlike individuals, they do not receive a discharge of debts.
What happens if I have no assets to liquidate in Chapter 7?
If there are no non-exempt assets to liquidate, creditors receive nothing, and the debtor still receives a discharge of eligible debts.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is a liquidation form of bankruptcy that allows individuals or businesses to discharge most of their debts while liquidating assets to repay creditors.
What assets can be kept in Chapter 7 bankruptcy?
Debtors are allowed to keep exempt property, which may include basic household goods, a modest car, and potentially a home, depending on the state's exemption laws.
How long does Chapter 7 bankruptcy take?
Most Chapter 7 bankruptcy cases take about 4 to 6 months from filing to discharge.
What is a discharge in Chapter 7 bankruptcy?
A discharge releases the debtor from personal liability for most debts and prevents creditors from taking any collection actions against the debtor.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
