What Are the Differences Between Chapter 11 & Chapter 7?
- Bankruptcy is the financial last resort for most people and businesses.Jupiterimages/Photos.com/Getty Images
Bankruptcy provides financial relief to individuals and businesses. Chapter 7 and Chapter 11, referenced by their respective sections of the U.S. Bankruptcy Code, define the regulations for two of the most common bankruptcy cases. Bankruptcy laws protect the needs and conditions of the debtor. For this reason, bankruptcy proceedings may have different results and effects. Each state determines the amounts of real and personal property exemptions that may be safeguarded from creditors. - Most people and businesses seeking the protection of bankruptcy do so after exhausting all other options. Those who choose to file a Chapter 7, or straight, bankruptcy may have few assets. According to the book "How to File for Chapter 7 Bankruptcy," this case provides the fastest relief from financial burdens to those who qualify.
Conversely, people with significant real and personal assets may elect to file a Chapter 11 bankruptcy. According to the book "The New Bankruptcy: Will It Work for You?," attorneys handling a Chapter 11 case usually charge a minimum $10,000 retainer. The court helps the debtor structure a repayment proposal. Sheltered by bankruptcy court, the debtor then repays creditors under more lenient terms. - Debtors must meet certain qualifications before filing a Chapter 7 bankruptcy. Debtors must also complete credit counseling within 180 days before filing a case. Filers submit a petition of bankruptcy with the United States Bankruptcy Court. Financial statements, including assets and liabilities, creditors and schedules, are submitted to the court clerk's local office. Individuals must file voluntary bankruptcy. However, businesses with unsatisfied creditors may become engaged in involuntary bankruptcy.
During a Chapter 7 case, the debtor gives up non-exempt properties to the bankruptcy trustee. The trustee then sells these belongings. The net proceeds of property are then distributed to the debtor's creditors, such as unsecured credit card accounts. The debtor may then discharge--or be relieved from paying--a portion of outstanding debt. Debtors must disclose all documents relating to their financial condition and debts. Some debts--educational loans, certain taxes and dependent support--are not discharged in bankruptcy. Failure to disclose these relevant details may mean forfeiting otherwise allowable debt discharge.
Many Chapter 7 filers have only exempt belongings. According to "Personal Bankruptcy Laws for Dummies," 96 percent of Chapter 7 cases avoid liquidation of any property for this reason. Exempt goods include clothing, an older car and household furnishings. The court does not require the surrender of exempt items, though the definition and amount of exempt goods depends upon the state in which the debtor lives. Relief under Chapter 7 is possible once every eight years. - Chapter 11 bankruptcy typically benefits businesses in financial distress. Chapter 11 is frequently referred to as corporate bankruptcy because of the size of financial assets and liabilities in its scope. According to "Business Valuation in Corporate Bankruptcy," companies should obtain independent assessments of capital assets and balance sheet items before filing a bankruptcy petition.
Reorganization rather than liquidation is the goal of Chapter 11 bankruptcy. Businesses seek to continue operations while they repay creditors according to new terms. Chapter 11 benefits both the business and its creditors because it helps the business to pay at least some of the money owed to creditors. Chapter 11 may be utilized by corporations, limited liability companies, partnerships and sole proprietors.
Chapter 11 may be used by individuals with substantial assets, though most individuals choose Chapter 13. Chapter 13, also called wage-earner bankruptcy, offers individuals with a regular source of income the option of developing a court-approved repayment plan.
