The Differences Between Chapter 7 and Chapter 11 Bankruptcy

Financial experts predict that there could be a sharp increase in bankruptcy filings happening in the next few months. Government shutdowns related to the coronavirus pandemic have caused significant financial challenges for many Americans who have lost their jobs or experienced a decrease in pay. The federal government and state governments have adopted programs to help families who cannot pay their bills. 

Government stimulus checks, mortgage forbearances, and government loans have helped many businesses stay open, but these loans are coming due, and these legislative aids will come to an end. As that process begins to unfold, companies will shut down, and more employees will lose their jobs, increasing bankruptcy filings. Individuals and businesses alike will be considering whether they should file for chapter 7 or chapter 11 bankruptcy. There are important differences in the processes and eligibility requirements for chapter 7 and chapter 11 bankruptcies.

Chapter 7 Bankruptcy

Chapter 7 bankruptcies are often referred to as liquidation bankruptcies. Individuals, partnerships, and corporations can file for chapter 7 bankruptcy to liquidate their assets, pay off their debts, and start fresh. After the debtor files for a Chapter 7 bankruptcy, the bankruptcy court will appoint a trustee who will manage the debtor’s case. The trustee will arrange for the liquidation of the debtors qualifying assets under the bankruptcy code’s rules. During the liquidation process, the bankruptcy trustee will sell all of the debtor’s non-exempt property for cash. The trustee will gather the proceeds from the sales and distribute payments to the debtor’s creditors.

Eligibility for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is only available to individuals, corporations, partnerships, and other business entities that meet the means test. In other words, debtors with high incomes or who own too many assets are not eligible for filing a chapter 7 bankruptcy. When a debtor’s current monthly income is higher than the state median income, the courts must apply a means test to decide whether the debtor can qualify for a chapter 7 bankruptcy.

When the debtor’s aggregate current monthly income over five years is over $12,850 for 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $7,700, the court will presume that the debtor earns too much to qualify for a chapter 7 bankruptcy. The debtor can still overcome this presumption, but in most cases, the court will convert the Chapter 7 bankruptcy to a Chapter 13 Bankruptcy with the debtor’s consent, or the court will dismiss the case outright.

The goal of a Chapter 7 bankruptcy is to allow the debtor to discharge certain types of debts. Doing so enables an individual to a fresh start because he or she will not have to contend with liability and continue paying debts that have been discharged. Keep in mind that in a Chapter 7 bankruptcy case, the discharge of debt is only allowed to individual people, not to corporations or partnerships. An individual filing for Chapter 7 bankruptcy will be able to walk away without debt, but not all types of debts will be discharged in a Chapter 7 bankruptcy. Additionally, a Chapter 7 bankruptcy cannot extinguish the debtor’s lien on a property.

Chapter 11 Bankruptcy

Many businesses choose to file a chapter 11 bankruptcy because they do not want all of their assets to be liquidated. Running a business is impossible when a trustee sells all of the business’s assets to pay back creditors. For those who would like to continue operating their business during the bankruptcy process, chapter 11 bankruptcies are a much better option.  

Many companies across the United States have filed for chapter 11 bankruptcy due to coronavirus-related government shutdowns. Movie theaters, restaurant chains, and gyms have all filed for chapter 11 bankruptcy, petitioning the court to help them reorganize their debt so they can continue operating their businesses and not close down entirely.

In a chapter 11 bankruptcy, the debtor can petition the court to adjust his or her debts by reducing the debts or by extending the time for repayment, or they may seek a more comprehensive reorganization. Chapter 11 bankruptcies are not limited to large corporations either. Sole proprietorships can qualify for chapter 11 bankruptcy.

In a chapter 11 bankruptcy, the debtor will seek to reorganize his or her assets. Chapter 11 bankruptcies are often recalled reorganization bankruptcies. In this type of bankruptcy, a corporation, a partnership, and some types of qualifying individuals can reorganize their debt. One of the benefits of filing a chapter 11 bankruptcy is that the debtor will not be required to liquidate all of his or her eligible assets to pay back creditors. 

Instead, the debtor will create a plan with the help of a bankruptcy trustee. He or she will present the bankruptcy plan to creditors. When the creditors accept the plan and the court approves it. In that case, the debtor can choose to reorganize his or her financial, business, and personal affairs to become a financially productive business or individual again.

Chapter 11 bankruptcies are among the most complicated of all different types of bankruptcies in the United States. They are also typically the most expensive type of bankruptcy proceeding. Businesses should not undergo a chapter 11 bankruptcy unless they have carefully analyzed their financial situation, spoken with an experienced bankruptcy lawyer, and explored other options for resolving their debts outside of the bankruptcy process.

Contact a Bankruptcy Lawyer Today

If you are one of the millions of Americans struggling to pay your bills on time, you are not alone. Filing for bankruptcy could be an option for you. The experienced bankruptcy attorneys at the Law Offices of Cibik Law will review your financial situation and advise you whether a chapter 7 or chapter 11 bankruptcy could help you start fresh. Contact us today to schedule your free case evaluation.