Tag Archives: Chapter 11 Bankruptcy vs Chapter 7

Chapter 7 and Chapter 11 Bankruptcy: A Comparison

The stagnant U.S. economy has led to the loss of millions of jobs and left many Americans in a financial crisis.  Many people who didn’t lose their homes in the initial round and in danger of losing them now due to unemployment.  Many Americans have exhausted all of their options and are looking for a way to salvage their lives.  For many of these people, their only viable option is bankruptcy.

Thousands of businesses, large and small alike have also found themselves unable to pay their bills.  They too are faced will the necessity of filing bankruptcy.

Having decided that bankruptcy is the best or the only option, a person or business next must decide what type of bankruptcy they will file.  The two most common types are Chapter 7 bankruptcy and Chapter 11 Bankruptcy.   Both types will help debtors recover, but there are important differences that must be considered before making a decision.

The biggest difference between Chapter 7 and Chapter 11 bankruptcies is how repayment of creditors is handled.  In Chapter 7, a person’s of business’s property is liquidated and the revenue used to pay the creditors.  Creditors are repaid according to the type of debt they hold.  Creditors holding debts secured with collateral are first to be repaid, either by retaking possession of the collateral, from proceeds of the liquidation, or a combination of both.  The remaining proceeds from the liquidation then go to remaining creditors.  When the proceeds are exhausted, most of the remaining debts are discharged.

In Chapter 11 Bankruptcy, assets are not necessarily liquidated.  Instead, the person or business filing bankruptcy is given a chance to reorganize their finances and/or operations.  They then present the plan to their creditors and if approved, they continue to operate under the supervision of the court, and begin to pay off creditors.  Once again, secured debt is paid first followed by other debt classified into categories.

Businesses that have substantial assets will generally choose Chapter 11 unless they absolutely cannot foresee any hope of recovery.  Chapter 11 is generally viewed as not only beneficial to the business, but also to the creditors and the economy.  If a company continues to operate, creditors are much more likely to be repaid and employees keep their jobs.  For individuals, unless they have substantial assets, chapter 11 offers very little advantage.

Most individuals forced to file bankruptcy have very little in the form of assets and thus liquidation is usually the best option.  Certain assets are protected and the person is allowed to keep possession of them.  These include a home, certain household items viewed as necessities and sometimes an automobile.  If the person owns little or nothing else of value, then most of the remaining debt is discharged and the person is free to start over.

One should keep in mind that bankruptcy law is very complicated and this is a very brief overview.  Anyone considering bankruptcy should speak to an attorney specializing in bankruptcy proceedings and get advice on the best course of action for their particular situation.

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