Difference between Chapter 7 and Chapter 11 Bankruptcy

Bankruptcy has become more prevalent in recent years for private individuals and businesses because of continued economic problems across the United States and increased credit spending by individuals. There are multiple bankruptcy options for both individuals and businesses. Chapter 7 is the most commonly used form for individuals, and is often called “liquidation bankruptcy.” Chapter 11 is a form commonly used by businesses.

Chapter 7

This method provides the utmost relief to a debtor, whether it be an individual or business, because debts are removed completely from their responsibility. Once successfully filed, the bankrupt party is forced to hand over ownership all of their possessions, apart from exempt items under federal or state law. They are placed under the control of an appointed bankruptcy trustee, who liquidates the assets, using them to pay creditors. However, filing is not a simple process, and not everyone is eligible. A “means test” determines eligibility by comparing an individual’s income to the median income of the given state, along with the nature of their debts and financial outlook. If the “means test” is not passed, Chapter 11 bankruptcy can still available for use.

Chapter 11

Though this method was designed to tailor to the needs of businesses that have fallen into debt, it is also available for use by private individuals. The process of Chapter 11 bankruptcy is a stark contrast to the complete relief of Chapter 7 bankruptcy. With this method, all debts are maintained by the filing party, however no assets are taken from them. Because of this, only individuals with a consistent and dependent income and businesses that can continue to earn profits can effectively use this method. The continued income is used to create a repayment plan through the bankruptcy court that must be accepted by all creditors and take place from three to five years.

Getting Help

Filing for either of these forms of bankruptcy, in addition to any other form, will always grant an “automatic stay” to the filer. This legally prevents creditors from continuing collection attempts. There are also many state specific regulations to the various forms of bankruptcy that complicate the already frustrating process. Professional legal help is widely available, and can easily be found using online services, but personal and business referrals are often the most effective for finding the write attorney for each case. These specialized bankruptcy attorneys take full control of cases, providing the knowledge needed to effectively navigate the process, but often at a high price that can be too much for individuals in debt.