Understanding Chapter 11 vs Chapter 7 Bankruptcy

One of the first steps of understanding one’s bankruptcy options, whether to avoid foreclosure or simply resolve outstanding debt obligations, is through understanding the important distinctions of Chapter 11 vs. Chapter 7 bankruptcy. In essence, Chapter 7 and Chapter 11 are different forms of bankruptcy filed under a specific section of the U.S. Bankruptcy Code, either Chapter 7 or Chapter 11, hence the names. In practice, these different chapters of bankruptcy are vastly different.

Chapter 11 Bankruptcy: Reorganization of Businesses and Certain Individuals

Chapter 11 is the form of bankruptcy often used by corporations, business entities, and certain high net wealth (and debt holding) individuals, who wish to reorganize their financial affairs, while also repaying a significant portion of debt obligations left outstanding. For individuals who wish to reorganize, but do not meet the debt to asset ratio for Chapter 11, Chapter 13 is the form of reorganization bankruptcy they must file. Under Chapter 11, business entities and certain individuals incur the following events:

• Automatic stay protections, once Chapter 11 is filed, are in place prevent further creditor collection actions until resolution of Chapter 11 filing

• Control of financial affairs left in the hands of a court-appointed trustee, who manages bankruptcy estate until Chapter 11 process ends.

• Creditors are typically repaid over a pre-determined period of time. Certain steps are taken to negotiate or reduce debt obligations owed, if possible.

• Reorganization of business entity or individual’s financial affairs occur, while ultimately result in sufficient income to repay creditors with viable claims against a business or individual

Chapter 7: Liquidation and Discharge for Individuals

Alternatively, Chapter 7 is a liquidation and discharge form of bankruptcy, which allows individuals who have met the requirements of the means and other eligibility testing, to file for protections under Chapter 7 of the U.S. Bankruptcy Code. These protections and provisions include:

• Affords debtor the ability to discharge certain unsecured debt obligations, with limited opportunity to discharge certain secured debts, but does not prevent liability for many debt obligations, contrary to popular belief. Debts not dischargeable during Chapter 7 include most secured debts, all tax related debt obligations, all child support and alimony obligations, and other case-specific debts that may arise in your case.

• Prevents creditor collection actions until the resolution of the bankruptcy process, effectively stopping any debt or lien related actions taken by creditors through what is known as an automatic stay.

• Chapter 7 requires liquidation of all non-exempt assets by the filer. The amount and number of non-exempt assets will widely vary from state to state and from case to case.

Getting Legal Help with Bankruptcy

In practice, the only definitive method of determining what type of bankruptcy you or your specific business entity will need to file is through consulting with a bankruptcy lawyer. It is important to note that certain requirements to file exist, including means tests and other considerations. Furthermore, depending on the case, filing for protections under any chapter of bankruptcy does not guarantee the desired outcome of filer. Having a realistic expectation and understanding of the bankruptcy process, including the implications of filing well into the future, is essential. For more information and insight about your specific case, consult with a bankruptcy lawyer in your state of residence.