What's the difference between chapter 7 and chapter 11 bankruptcy?
UPDATED: August 6, 2020
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Filing for bankruptcy is one of the hardest things for a business to do. This term scares off shareholders, promoters, and even customers.
As soon as you file for bankruptcy, everyone thinks that you are drowning, which is not always the case.
If you are here, it probably means that you have gone through your options and settled on filing for bankruptcy. The only thing remaining is deciding which type of bankruptcy you should consider.
There are various chapters of bankruptcy, not just chapters 7 and 11. However, chapters 7 and 11 tend to focus on bankruptcy for small businesses, companies, or corporations.
You must understand a few differences between chapters 7 and 11 bankruptcies before you can pick which one to file.
Why would you want to file for bankruptcy?
Being bankrupt is one of the legal processes that temporarily changes your company status.
Taking this step gives your business adequate time to sort out its financial problems. The idea is to enable you to stabilize while avoiding lawsuits from creditors.
These steps can also keep your business from foreclosure and prevents the government from seizing your property, hopefully giving you enough time to get everything sorted out.
As soon as you file for bankruptcy, the court will order your creditors not to collect any debts and instead fill out a document. Doing so lines them up for payment, and the court sees to it that every one of them gets their money back.
Even though bankruptcy keeps your business from finding itself in worse conditions, it is always advisable that you use it as a last resort. As soon as you file for bankruptcy, the credit score for your company becomes low.
What is the difference between chapter 7 and chapter 11?
Now that you have an overview of how you may find yourself in such a position, it’s time to have a look at the difference between chapter 7 and 11 bankruptcy.
To make the right choice for your company, it is imperative that you understand each individually.
Chapter 7 Bankruptcy
One of the most common types of bankruptcy for small businesses is chapter 7. It is sometimes known as the liquidation bankruptcy. Most people who file for this type of bankruptcy want a fresh start, and they can only file it after ceasing all operations.
This is the type of bankruptcy where trustees sell the non-exempt assets of the debtors, and the funds collected go to creditors in a bid to settle their debts.
As soon as you file for chapter 7 bankruptcy, the court appoints trustees whose work is to handle the paperwork.
One of the things they do is have a look at your income and other non-exempt items that your business possesses. If there are no items, your creditors end up getting nothing after the whole process.
You should also know that the court will not automatically approve your case for chapter 7 bankruptcy. If the trustees scrutinize your income and find it to be high, then you will not qualify for chapter 7.
You will instead be referred to section 13 of the bankruptcy code.
Chapter 11 Bankruptcy Code
Another common type of bankruptcy is chapter 11. Some people refer to it as the reorganization bankruptcy.
As the name suggests, it is the type of bankruptcy that allows corporations, sole proprietorships, and individuals to reorganize their business without having to liquidate the business assets.
Applying for chapter 11 bankruptcy requires you to have a plan that you are going to use to pay your creditors. You will have to present the payment plan to your creditors upon filing for reorganization bankruptcy.
The creditors will scrutinize your payment plan, and if it is satisfactory, they will notify you. The court will then review the whole situation and approve the idea before you can proceed to initiate the plan.
The good thing about reorganization bankruptcy is that business continues to operate while having breathing room to pay back creditors. Upon completion of the debts, the company can continue carrying on its business without any problems whatsoever.
The other benefit of chapter 11 bankruptcy is that it doesn't ruin your reputation like chapter 7. You thus have the chance to emerge better and stronger so long as your plan works.
What happens if you don’t file for bankruptcy?
Failing to file for bankruptcy can end up costing your business so much. If you refuse to file, you might see individuals coming for your assets and auctioning your items.
Refusing to file for bankruptcy can also make the debts' interests to accrue much further, and in the long run, your business is the one that ends up suffering most.
Filing for chapter 7 or chapter 11 bankruptcy can help prevent worse things from happening.