Whether you file for Chapter 7 or Chapter 11 is largely based on how much income you earn. If you earn above a certain threshold, then you will not qualify to file for Chapter 7. Chapter 7 and Chapter 11 are similar ways of getting out of a financial crunch, but they have various requirements and consequences for doing so. Below are some of the key differences between Chapter 7 and Chapter 11 bankruptcy.
Liquidation Vs. Reorganization
Chapter 7 bankruptcies are the most common, and they are often referred to as the ‘liquidation’ bankruptcy. Basically, companies that choose this way are past the point of being able to reorganize, and therefore must sell off assets that are not exempt to creditors. The court will appoint a trustee, who will then ensure that any assets that are secured are sold and paid out to specific creditors in the appropriate order of priority. Anything that is left over after the secured creditors are paid will be paid out to creditors with unsecured loans, such as preferred shareholders of the organization.
Chapter 11 bankruptcies are often referred to as reorganization bankruptcies. Instead of simply paying off the creditors with the assets, it allows the company to reorganize debt. The firm can contract its creditors and change the terms of payment – such as the interest rate, frequency of payments and even the outstanding balance. If a trustee is appointed in this scenario, he or she will oversee the process, and supervise the assets of the debtor as a sort of protector, rather than sell them off. The firm will still owe debt – Chapter 11 just allows them to reorganize how it is paid.
Forgiveness Vs. Repayment
Each form of bankruptcy has a different goal as well. Chapter 7 typically results in forgiveness of debt, particularly consumer debt. That is, debt that cannot be repaid via liquidation will typically be forgiven, especially if it is unsecured debt. Some kinds of debt can never be discharged, including student loans and child support. But, Chapter 7 is a good option for people overwhelmed by what they owe, as it lets them create a new start. It’s also a quicker and more simple form of bankruptcy, even if the debtor has to give up a lot of property to get their heads above water.
Chapter 11 bankruptcy, on the other hand, has a different goal: to enable the debtor to eventually pay off their debt. Chapter 11 bankruptcies are voluntary procedures, undertaken by firms with initiative to handle their debts. Most of the time, Chapter 11 bankruptcies are filed by corporations rather than individuals, although it can be done by individuals if they have too much debt or income to qualify for Chapter 7.
Individuals Vs. Businesses
Chapter 7 is designed to benefit individuals. Because the goals are different from Chapter 11, Chapter 7 recognizes that individuals are not in a position to be able to eventually repay their debts. Individuals typically have unsecured debts – in particular credit card debts. Chapter 7 bankruptcies are more efficient and quick than other kinds, and individuals take note. In 2010, close to 1.6 million people in America filed for bankruptcy under either Chapter 7 or Chapter 13 – over 100 times the number of Chapter 11 bankruptcies initiated during the same time period.
Chapter 11, on the other hand, assumes that the entity filing for bankruptcy has sufficient income to eventually pay off debt. Chapter 11 is often used by corporations and partnerships – General Motors, Lehman Brothers and United Airlines have all filed for Chapter 11. They are all making a huge sum of money, but chose Chapter 11 to make it more feasible to pay off their loans. Crucially, Chapter 11 prevents the sale of assets, which would inhibit that business’s ability to continue to make money.
Find a Bronx Bankruptcy Lawyer
I have over 30 years of experience in Chapter 7 and Chapter 13 Bankruptcy in the state of New York. If you need a fresh start, call today for a free case evaluation. I’ve helped thousands of families through their bankruptcy, and have provided education on credit health that they’ve gone on to use successfully for years. I can put this same experience to work for you. Call today for a fresh start with a Bronx Bankruptcy Attorney you can trust.