Chapter 7 vs. Chapter 11 Bankruptcy | Bloomberg Law (2024)

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Chapter 7 vs. Chapter 11 Bankruptcy | Bloomberg Law? ›

Chapter 7 cases are typically only filed voluntarily by the debtor. The primary purpose of a Chapter 11 bankruptcy is to give business entities and individuals with large amounts of debt an opportunity to reorganize their financial affairs.

In a Chapter 7 bankruptcy, assets are liquidated to pay creditors, with secured debts having priority over unsecured debts. In a Chapter 11 bankruptcy, a company is restructured under the supervision of a trustee appointed by the court. The company continues to operate, paying its debts back with future earnings.

Chapter 7 is a liquidation: Trustee will collect and then sell off debtor's non-exempt assets to pay off debts. Chapter 11 and 13 are reorganization: Debtor will keep most of his property but will use future income (earnings) to pay off debts.

This chapter of the Bankruptcy Code generally provides for reorganization, usually involving a corporation or partnership. A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.

Chapter 7 provides relief to debtors regardless of the amount of debts owed or whether a debtor is solvent or insolvent. A Chapter 7 Trustee is appointed to convert the debtor's assets into cash for distribution among creditors.

The main cons to Chapter 7 bankruptcy are that most unsecured debts won't be erased, you may lose nonexempt property, and your credit score will likely take a temporary hit. While a successful bankruptcy filing can give you a fresh start, it's important to do your research before deciding what's right for you.

A Chapter 11 bankruptcy is a long and costly process, which can be hard for businesses struggling to stay afloat. While it doesn't force them to sell assets, it can cost them plenty in filing fees and legal fees. After their plan is confirmed, they will be paying off their old debts for a number of years.

Once the debtor has fulfilled the obligations in the plan, the remaining debts are discharged. That means that the debtor no longer owes the debt, and creditors cannot make an effort to collect them. With the debts wiped out, the debtor can begin to recover their financial and credit health.

The benefits of Chapter 11 bankruptcy are that the business will continue to operate and will ideally come out the other side of bankruptcy in much better financial health. Hopefully, as a more financially secure or profitable venture.

When companies see their collective bargaining agreements as unworkable, they often file Chapter 11 Bankruptcy. The bankruptcy laws allow companies to renegotiate union contracts in certain cases.

What is the major advantage of Chapter 7 bankruptcy? ›

With Chapter 7 Bankruptcy, Your Debt Is Discharged

One of the major advantages of filing chapter 7 is that it can wipe out all or most of your debt. Your debt is discharged, meaning that you no longer have a legal obligation to pay it.

Chapter 7 and Chapter 13 bankruptcy are two of the most common types of bankruptcy filings. But there are four other types — Chapters 9, 11, 12, and 15. Here is a breakdown of the six different types of bankruptcy filings, starting with the most common.

Most bankruptcy cases pass through the bankruptcy process with little objection by creditors. Because the bankruptcy system is encoded into U.S. law and companies can prepare for some debts to discharge through it, creditors usually accept discharge and generally have little standing to contest it.

What Debts Are Discharged in Chapter 7 Bankruptcy? A Chapter 7 bankruptcy will generally discharge your unsecured debts, such as credit card debt, medical bills and unsecured personal loans. The court will discharge these debts at the end of the process, generally about four to six months after you start.

Chapter 13 bankruptcy is deleted seven years from the filing date because it requires at least a partial repayment of the debts you owe. Chapter 7 bankruptcy is deleted 10 years from the filing date because none of the debt is repaid.

The consequences of a Chapter 7 bankruptcy are significant: you will likely lose property, and the negative bankruptcy information will remain on your credit report for ten years after the filing date. If you've already filed for bankruptcy, find out if you can remove bankruptcy from your credit report.

Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal ...

Chapter 11 bankruptcy is also known as “reorganization” or “rehabilitation” bankruptcy. It is the most complex form of bankruptcy and generally the most expensive.

During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. In most cases, the company remains open and operating. Many large U.S. companies have filed for Chapter 11 bankruptcy at one time or another to stay afloat.

Do you get paid in Chapter 11? ›

Chapter 11

Many employees may remain at work and continue to be paid and receive benefits. However, some may be laid off. If the laid-off employees are owed wages and benefits they become creditors of the company.

There are no specified limits on the length of a Chapter 11 plan. A Chapter 11 plan must be long enough to convince the court and creditors that the debtor is making a good faith effort to pay as much of its debt as is realistically possible.

Examples Of Chapter 11 Bankruptcy

While Chapter 11 bankruptcies may appear to be a lot more successful than Chapter 7 situations, history shows that most companies entering Chapter 11 don't survive either. Less than 10% of Chapter 11 filings have actually been successful.

Secured creditors like banks are going to get paid first. This is because their credit is secured by assets—typically ones that your business controls. Your plan and the courts may consider how integral the assets are that secure your loans to determine which secured creditors get paid first though.

Chapter 11 Costs So Much Because it is Extensively-Monitored

In fact, a good part of the initial filing fee goes towards the first payment of this cost. In many Chapter 11 cases, the United States Trustee will directly conduct the initial meeting of creditors.

Largest bankruptcies

The largest bankruptcy in U.S. history occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than $639 billion in assets. Lehman Brothers Holdings, Inc. Worldcom, Inc.

More than likely, you would only be dealing with the two most common types of bankruptcies for individuals: Chapter 7 and Chapter 13. (A chapter just refers to the specific section of the U.S. Bankruptcy Code where the law is found.²) But we'll take a look at each type so you're familiar with the options.

Many large companies file under Chapter 11 of the Bankruptcy Code rather than Chapter 7 because they can still run their business, control the bankruptcy process and attempt to become profitable again while seeking protection from their creditors.

Chapter 11 allows a business to continue operating with restructured debt and lower payments. An “automatic stay” prevents foreclosures and ongoing debt collection. The stay protects the debtor from all lawsuits, bank levies, foreclosures, repossessions, and wage garnishments.

In a Chapter 11 bankruptcy proceeding, if a company or individual filer (the “debtor”) is unable to pay its creditors in full, the absolute priority rule bars owners from retaining their interests unless the owners contribute “new value” to the business.

Can a company come back from Chapter 11? ›

Key Takeaways. Filing for Chapter 11 bankruptcy allows a company to restructure its debts. In some cases, companies are able to emerge from bankruptcy stronger than ever. General Motors, Texaco, and Marvel Entertainment are three of many companies that have emerged from bankruptcy successfully.

The benefits of Chapter 11 bankruptcy are that the business will continue to operate and will ideally come out the other side of bankruptcy in much better financial health. Hopefully, as a more financially secure or profitable venture.

When companies see their collective bargaining agreements as unworkable, they often file Chapter 11 Bankruptcy. The bankruptcy laws allow companies to renegotiate union contracts in certain cases.

Key takeaways. Filing for bankruptcy can hurt an individual's credit, and the impact can last for years. A Chapter 7 bankruptcy may stay on credit reports for 10 years from the filing date, while a Chapter 13 bankruptcy generally remains for seven years from the filing date.

Debt collectors cannot try to collect on debts that were discharged in bankruptcy. Also, if you file for bankruptcy, debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.

You'll likely have to give up all of your credit cards if you file for Chapter 7 bankruptcy, but you can start rebuilding your credit once your case is closed.

An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individual's debts are discharged in chapter 7.