Difference Between Chapter 7 and Chapter 11 Bankruptcy
Chapter 7 of the bankruptcy code is responsible for controlling the process of the liquidation of the assets where absolute priority rule is mentioned that stipulates the order according to which payment of the debt will be made, whereas in the case of Chapter 11 of the bankruptcy code individual or the business that requires some time duration for debt repayment will approach the creditors for changing the terms and condition for the loan like interest terms etc.
When a business has too much debt, and there is no way to move out from this situation, then a business can file bankruptcy and restart from fresh. In the Federal Bankruptcy code, there are different ways through which a business can file bankruptcy. These ways are known as “chapters.” This article looks at the differences between the most common chapters, i.e., chapter 7 vs. chapter 11.
What is Chapter 7 Bankruptcy?
In this chapter 7 bankruptcy liquidation of assets takes place. The debtor pays his debts by selling his/her personal assets. The debtor pays his secured loan on a priority basis because creditors can claim for collateral like a car loan, home equity loan, mortgage, etc. After paying secured loansSecured loans refer to the type of loans approved and received against a guarantee or collateral. If they fail to do so, the lending institution acquires the collateral to compensate for the amount that the borrowers were allowed.read more if still some money is left to the debtor, he pays unsecured loans like a credit card, unsecured personal loan, etc.
- Once a company or an individual files for this chapter, the business shutdowns its operation, and management is dismissed. The company or individual is not able to continue its operation. In simple words, the business gets closed after filing for this chapter.
- After filing bankruptcy under this chapter, the court appoints one or more trustees to analyze the actual value of liquidating assets. After that only one can decide whom to pay first.
- There can be a possibility that generated money from liquidation is insufficient to pay all debts. So, in this case, the debtor pays only secured loans and ignoresAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more unsecured loansAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more.
- The benefit of chapter 7 is that there is no repayment plan left, and the debtor can start again from the beginning. There is no limitation on the amount of debt that the debtor needs to pay.
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What is Chapter 11 Bankruptcy?
In this chapter, restructuring debt, repayments take place. The debtor files bankruptcy under this chapter to save their asset. This way of filing bankruptcy helps in avoiding the liquidation of assets.
- The company or a business file for this chapter is when the company can run its operation but cannot pay its debts. So this gives a chance to the company or an individual to stand again and run the business. There are some terms and conditions for filing Chapter 11. A company should generate regular income to run its operations, and the restructured payment plan should be submitted to the court.
- In this case, the court appoints a trustee to reorganize loan repayment and make some changes in terms and conditions of repayment terms
- Through this, the debtor can efficiently manage their loan repayment. It also helps the debtor to negotiate repayment plans with creditors. New terms and conditions form for both creditors and debtors regarding loan repayment.
Chapter 7 vs Chapter 11 Bankruptcy Infographics
Let’s see the top differences between chapter 7 vs chapter 11 bankruptcy.
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Key Differences
The key differences are as follows –
#1 – Type
In Chapter 7, liquidation of assets occurs, whereas, in chapter 11, restructuring of loan repayment takes place.
# 2 – Processing Time
In chapter 7, the whole process of liquidation takes 4 to 6 months to wind up, whereas, in chapter 11, it’s a long run process because, during the time of restructuring debt repayment, there are chances that company debt payment duration can be extended.
# 3 – Closure
In chapter 7, a company or individual is not able to run operation, whereas, in chapter 11, the company get the chance to run operations again.
# 4 – Advantages
In chapter 7, no repayment plan debtor can start from starting again without having any debt limitation. In chapter 11, the company gets the chance to stand again and run its operations.
Chapter 7 vs Chapter 11 Bankruptcy Comparative Table
| Liquidation of assets takes place | Restructuring of debt payment takes place |
| After liquidating assets, payment is made for secured loans then comes to unsecured loans. | New terms and conditions form for repayment of debt |
| There are chances that debt can be forgiven. | Payment can be a delay but not forgiven |
| Trustee appoints by the court to analyze the value of liquidating assets | Trustee appoints by the court to form a new structure of repayments |
| As many as debts have been paid | Might be chances that creditors change their interest rates |
| Company or individual shutdowns their operation | Companies or individuals continue with their operation but their debt repayments. |
Final Thought
Both chapters have some advantages and disadvantages. It depends on the company’s owner how they want to proceed.
- Chapter 7 – In this case, the company must have to show that it cannot run the operation. It depends on the company’s owners and how they want to prove it. But the company’s owner should be ready to liquidate his assets as debt payment can only be made by liquidating assets into cash.
- Chapter 11 – Suppose if an individual or a company doesn’t want to close business and files for chapter 11, then they need to show regular income from operations so that the court can allow them to run operations and give some time to repay the debt. But if they want to run a business and cannot generate regular income, then one cannot file for chapter 11 because the company may require some funds to run operations and cannot ask for further debt.
Recommended Articles
This has been a guide to Chapter 7 vs. Chapter 11 Bankruptcy. Here we also discuss the top 6 differences between these bankruptcies and infographics and a comparative table. You may also have a look at the following articles –
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