Chapter 7 bankruptcy and Chapter 11 bankruptcy are both common ways for businesses to declare bankruptcy. The main difference between them is going out of business in one and reorganizing and restructuring debt in the other.
By filing a petition under either Chapter 7 or Chapter 11, a business can go out of business through the bankruptcy process. But the main goal of Chapter 7 bankruptcy is to get rid of the debtor’s non-exempt assets, pay off creditors, and give the debtor a fresh start by letting them off the hook for their debts. Chapter 7 cases are usually only filed if the debtor wants to do so.
Chapter 11, which is called “reorganization,” usually involves a company or a partnership. The Bankruptcy Code makes this possible. A chapter 11 debtor will often present a plan of reorganization so that they can keep running their business and pay their creditors. Chapter 11 can be used by both businesses and people. The Bankruptcy lawyers help decide if a case under Chapter 11 should be filed. Bankruptcy lawyers can provide legal aid and help in choosing the right chapter to suit your needs.
Most people will want to file for bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy is especially for people who want a “fresh start,” but companies can also file for Chapter 7 bankruptcy (and commonly do). This type of bankruptcy is based on getting rid of as much debt as possible and selling assets to pay off what remains.
Either Chapter 11 or Chapter 7 bankruptcy can be filed by anyone with any amount of debt. However, to file for Chapter 7 bankruptcy, people must pass a “means test.” Usually, this means they have a lot of debt that they can’t pay back and/or a low income that makes it hard to pay back their debts. Chapter 7 filings are less likely to be approved for people who have a lot of extra money.
Chapter 11, which costs more than Chapter 7, is usually for medium-sized to large businesses, but small businesses and sole proprietors may also want to look into it. In Chapter 11,
Unlike Chapter 7, assets are not sold. Instead, debts are reorganized. This lets a debtor keep valuable assets, like a business, from being sold off. Chapter 11 bankruptcy affects both business and personal assets in the case of sole proprietorships and other small businesses like them.
“Liquidation” is another name for Chapter 7 bankruptcy. When a business goes through this type of bankruptcy, the reorganization stage is over and the business must sell its assets to pay off its debts. For most people, the process is pretty much the same.
A trustee will be chosen by the bankruptcy court to make sure that creditors are paid back in the right order, according to the rules of “absolute priority.”
In bankruptcy, secured debt takes priority over unsecured debt and is paid off first. Secured debt includes loans from banks or other financial institutions that are backed by a specific asset, like a building or an expensive piece of machinery.
After all the secured creditors have been paid, any assets and cash that are still left are put together and given to creditors with unsecured debt like people who own bonds or shares of preferred stock.
To file for Chapter 7 bankruptcy, the debtor can be a corporation, a small business, or a person. Chapter 13 bankruptcy is another option for people. In this type of bankruptcy, the debtor agrees to pay back at least some of their debts over the course of three to five years.
Chapter 11 bankruptcy is sometimes called “reorganization” or “rehabilitation.” It is the hardest way to go bankrupt, and it usually costs the most as well. Because of this, it’s more likely to be used by corporations, partnerships, joint ventures, and limited liability companies (LLCs).
Chapter 11 is different from Chapter 7 in that it lets a company reorganize its debt and try to start over as a healthy business.
The first step in a Chapter 11 case is to file a petition with a bankruptcy court. The debtor can file the petition on their own, or creditors can do it for them if they want their money.
During Chapter 11 bankruptcy, the debtor will stay in business while taking steps to get their finances back on track, such as cutting costs, selling off assets, and trying to renegotiate their debts with creditors. All of these steps will be done under the watchful eye of the court.
The Small Business Reorganization Act of 2019, which went into effect on February 19, 2020, added a new subchapter V to Chapter 11 to make it easier and faster for small businesses to file for bankruptcy.
The U.S. Department of Justice defines small businesses as “entities with less than about $2.7 million in debts that also meet other criteria.” The act “shortens the time needed to finish the bankruptcy process, gives creditors more freedom to negotiate restructuring plans, and sets up a private trustee to work with the small business debtor and its creditors.”
Chapter 11, which is often called the “reorganization chapter,” allows businesses, partnerships, and people to reorganize without having to sell all of their assets.
When a debtor files for Chapter 11, he or she gives the creditors a plan that, if accepted by the creditors and approved by the Court, will let the debtor reorganize his or her personal, financial, or business affairs and start making money again.
Before filing under Chapter 11, you must meet all these requirements. To avoid having to file the certificate of credit counseling:
- A debtor must submit a different certificate that says there were urgent circumstances that made it necessary to waive the requirement.
- The debtor must show that they asked for credit counseling but couldn’t get it in the 7 days before filing
- The debtor was informed in writing that they can’t get credit counseling because they are sick, disabled, or serving in the military in a combat zone.
When it seems impossible to solve the company’s financial problems, filing for bankruptcy may be the relief you need and the step you need to take. Chapter 11 bankruptcy can help a lot of businesses, especially if you want to fix up your business and keep it going instead of closing it down.
The court will help a business reorganize its debts and obligations during a Chapter 11 proceeding. The business is open and running most of the time. In the United States, a lot of big companies file for Chapter 11 bankruptcy and stay in business.