Chapter 7 vs. Chapter 11: An Overview

Companies that find themselves in a dire financial situation where bankruptcy is their best—or only—option have two main choices in the U.S.: 澳洲幸运5官方开奖结果体彩网:Chapter 7 bankruptcy or 澳洲幸运5官方开奖结果体彩网:Chapter 11 bankruptcy. Both are a🏅lso available to individuals.

Under a Chapter 7 bankruptcy, the business closes its doors an🍬d its assets are sold off to pay its credi൲tors. In a Chapter 11 bankruptcy, the company may continue to operate under court supervision.

Chapter 7

Chapter 7 bankruptcy is sometime🎃s called liquidation bankruptcy. Businesses going through this type of bankruptcy are past the stage of recove🧜ry and must sell off assets to pay their creditors. The process works much the same for individuals.

The bankruptcy court will appoint a trustee to ensure that creditors are paid off in the right order, following the rules of “澳洲幸运5官方开奖结果体彩网:absolute priority.”

澳洲幸运5官方开奖结果体彩网:Secured debt takes precedence over 澳洲幸运5官方开奖结果体彩网:unsecured debt in bankruptcy, and the holders of secured debts are first in line to be paid off. Loans tha🎃t are secured by a specific asset, such as a b💜uilding or a piece of expensive machinery, are examples of secured debt.

Whatever assets and cash remain after all the secured creditors have been paid are pooled together and distributed to 澳洲幸运5官方开奖结果体彩网:creditors with unsecured debt. Those would include bondholders and shareholders with 澳洲幸运5官方开奖结果体彩网:preferred stock.

To qualify for Chapter 7 bankruptcy, the debtor can be a corporation, a small business, or an individual.

Individuals are also eligible for another form of bankruptcy, 澳洲幸运5官方开奖结果体彩网:Chapter 13, in which the debtor agrees to repay at least a portion of their debts over a three- to five-year period under court supervision.

Chapter 11

Chapter 11 bankruptcy is also known as “reorganization” or “rehabilitation” bankruptcy. It is the most complex form of bankruptcy and generally the most expensive. For that reason, it’s most often used by businesses rather than individuals. The business may be corporations, partnerships, 澳洲幸运5官方开奖结果体彩网:joint ventures, or 澳洲幸运5官方开奖结果体彩网:limited liability companies (LLCs).

Unlike Chapter 7, Chapter 11 gives a company an opportunity to 澳洲幸运5官方开奖结果体彩网:reorganize its debt and try to reemerge as a healthy business𝓡.

A Chapter 11 case starts with the filing of a petition in a bankruptcy court. The petition may be a voluntary one, filed by the debtor,ꦑ or an involuntary one, filed by creditors who want their money.

During Chapter 11 bankruptcy, the business will keep operating while taking initiatives to stabilize its finances, such as cutting expenses, selling off assets, and attempting to renegotiate its debts with creditors—all under the court’s supervision.

The Small Business Reorganization Act of 2019, which went into effect on February 19, 2020, added a new subchapter V to Chapter 11 designed to make bankruptcy easier and faster for small businesses, which the U.S. Department of Justice defined as “entities with less than about $2.7 million in debts that also meet other criteria.” The act “imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee who will work with the small business debtor and its creditors,” the Justice Department says.

Chapter 7 vs. Chapter 11: Key Differences

Like Chapter 7, Chapter 11 requires the appointment of a trustee. However, rather than selling off all assets to pay back creditors, the trustee supervises the assets of the debtor a♊nd allows the business to continue.

It’s important to note that debt is not absolved in Chapter 11. 澳洲幸运5官方开奖结果体彩网:The restructuring only changes the terms of the debt, and the company must continue to pay it back through fಌuture earnings.

If a company is successful in Chapter 11, then typically it will be expected to continue operating in an efficient manner with its newly structured debt. If it is not successful, it will file for Chapter 7 and 澳洲幸运5官方开奖结果体彩网:liquidate.

How to Prevent Bankruptcy

Bankruptcy is generally a last resort for businesses and individuals alike. Chapter 7 will, in effect, put a business out of business, while Chapter 11 may make lenders wary of dealing with the company after it emerges from bankruptcy. A Chapter 7 bankruptcy will remain on an individual’s credit report for 10 years, and a Chapter 13 for seven.

Bankruptcy can be unavoidable. A business can go under during a severe recession. An indivi🐲dual can suffer a job loss or crushing medical expenses.

Still, many bankruptcies could have been avoided. One key, for both businesses and individuals, i💝s to borrow judiciously. For a business, that could mean not expanding too rapidly. For an individual, it might mean not buying a larger home or a costlier car.

Before filing for bankruptcy𓃲, a business owner should consult with an outsid♍e attorney who specializes in bankruptcy law and discuss the alternatives.

Individuals are required by law to take an approved credit counseling course before they file. They may also have other resources available, such as a reputable debt relief company that can help them negotiate with their creditors. Investopedia publishes an annual list of the best debt relief companies.

The Bottom Line

Chapter 7 and Chapter 11 are two comm🔯on options for busines🌜ses to declare bankruptcy.

Chapter 7 is considered a liquidation bankruptcy: it doesn't require a repayment plan but the business has to sell some assets to pay creditors.

Chapter 11 is considered a reorganization bankruptcy that allows businesses to maintain t🙈heir operations while creating a plan to repay creditors.