Chapter 7 vs Chapter 11 Bankruptcy

Published: Jun 12, 2020

Chapter 7 vs Chapter 11 Header Deciding Between Two Options

You may be facing unemployment and bankruptcy due to the COVID-19 pandemic. Both Chapter 7 and Chapter 11 bankruptcy plans are very effective in tackling debt—and both are available as a debt relief method. Numerous factors determine the type of bankruptcy plan you’re allowed to apply for, apart from other conditions set by the government. There are pros and cons of bankruptcy that may be considered. In this article, we’ll discuss what it takes to apply for both Chapter 7 and Chapter 11 bankruptcy. 

Differences Between Chapter 7 and Chapter 11 Bankruptcy 

Liquidation vs. Reorganization

The most prominent difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy is that Chapter 7 bankruptcy is a liquidation bankruptcy, While Chapter 11 bankruptcy is termed a reorganization bankruptcy.

Chapter 7 Business Cases 

When a business if filing for a Chapter 7 bankruptcy, then it means that the business will close. Parties and other secured creditors that have a lien on their collateral will get their collateral. In Chapter 7 bankruptcy, the assets are sold by the Chapter 7 trustee, and the proceed from the sales is used to settle the company’s unsecured creditors. The control of the business will be handed over to the Chapter 7 trustee from the date a bankruptcy petition was filed

Chapter 11 Business Cases

If a business desires to stay in business but file for bankruptcy, then the most logical bankruptcy plan that can help them achieve that goal is Chapter 11 bankruptcy. When a Chapter 11 bankruptcy is filed, the control of the business still remains with the owners of the business, while the Chapter 11 bankruptcy case goes on. Chapter 11 bankruptcy has some specific guidelines that debtors must follow, and refusal to follow those guidelines will lead to disastrous consequences. 

If a debtor is filing for a Chapter 11 bankruptcy, he/she needs to realize that the process is a very complex one that requires the debtor to file a detailed Disclosure Statement that adequately lists details of the interest of different parties and creditors—not excluding the liabilities, income, business history, and other business affairs. The purpose of the disclosure statement is to provide the parties involved in the business with adequate information on the financial state of the business so that they can make an educated vote on if they should file for Chapter 11 bankruptcy or not. 

The debtor is also mandated to fill a well-detailed Chapter 11 plan of reorganization. The Chapter 11 plan is more detailed than the Chapter 13 plan, as it contains how all classes of creditors will be paid, and a description of the classes of claims. Creditors will be asked to vote in favor or against the Chapter 11 payment plan that is proposed by the debtor, if the creditors vote against the plan, then the debtor should suggest a different plan. 

Sometimes, the bankruptcy court may appoint Creditors’ Committees to investigate the conduct of the debtor, and actively take part in the case administration, not excluding the drafting of a new Chapter 11 plan. Creditors themselves may propose a plan to the bankruptcy court for consideration. 

A typical Chapter 11 case involves the filing of numerous motions, such as motions to value assets, use cash collateral, reject or assume leases, cancel or continue contracts, and value assets. A creditor may file a motion that the case should be dismissed or converted to a Chapter 7 bankruptcy. 

A debtor may remain in Chapter 11 bankruptcy for years. A business Chapter 11 bankruptcy case is a very complex procedure, and the process can be over a year, during that period, the debtor must file monthly reports and pay quarterly fees. 

After confirming the Chapter 11 plan, the debtor will be discharged from any debt incurred before the date of confirmation. A new contract is created with the creditors, and if the debtor still falls short of the payment plan, then the creditor can take legal actions to collect the debts. 

A business that owns a single asset should file a streamlined Chapter 11 case rather than the complex Chapter 11. Finally, there are instances where you may look at filing a Chapter 11 bankruptcy as an individual although those occurrences may be rare.

Chapter 7 individual Cases 

Most people wonder when will a debt collector sue for unpaid debt as that can be a turning point to decide whether to file for Chapter 7 bankruptcy. Individuals’ neck-deep in debt who wish to file for a Chapter 11 or Chapter 7 bankruptcy can do that, however, to file under Chapter 7 bankruptcy, then you have to meet its income requirements. Chapter 7 bankruptcy is designed for people who can’t pay off their debt irrespective of how the debt is restructured. When an individual files under a Chapter 7 bankruptcy, the Chapter 7 trustee that is assigned to be in charge of the case may sell any of the debtor’s property termed as non-exempt property. Non-exempt properties are those properties with equity that is above the liquidation exemption limit of the state. 

The value of the exemption depends on whether the debtor is using a state or federal exemption. The state of residence of the debtor for two years before filing for an exemption determines what the debtor can claim.

The majority of Chapter 7 bankruptcy cases filed by individuals are termed as a no-asset case. If a debtor files for a no-asset case, then the Chapter 7 trustee will not liquidate any of the debtor’s property. The duration for completing a Chapter 7 case is a period of four to six months after filing the case. Once the case is complete and the bankruptcy court agrees that the debtor has complied with its judgment, the debtor will get a bankruptcy discharge for the majority of its unsecured debts. Some of the debts that won’t be discharged under the Chapter 7 bankruptcy plan are alimony, tax debts, student loans, and debts owed to the government. 

However, under some conditions, a debtor who files under Chapter 7 bankruptcy may get a discharge of old income tax debts or a student loan discharge. 

Did you know you can Write for us?

Check out our Guest Post Guidelines to see what it takes.

Submit an Article