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What's the difference between Chapter 7 and Chapter 11?

If you are a business owner, the future and profitability of that business are likely top priorities for you. In the pursuit of this success, you will have to make some very difficult decisions. This can be especially challenging when a business is struggling and facing the possibility of shutting down because they are buried in unmanageable debt.

In many cases, companies will need to seek relief through bankruptcy. Doing so will not resolve financial problems overnight, but it will be an effective way to address debt. The main decision people have to make when it comes to bankruptcy protection for businesses is which type of bankruptcy they will pursue. Generally speaking, this decision is between two types: Chapter 7 and Chapter 11.

A few of the main differences between Chapter 7 and Chapter 11 are examined below.

  • What happens to the debt: In Chapter 7, assets may be liquidated and eligible debts will be discharged. In Chapter 11, some debts may be discharged, but others are repaid after leases, contracts and other financial agreements are renegotiated. 
  • How much it costs: In order to file Chapter 7, there are $335 in fees and surcharges that must be paid. Filers of Chapter 11 must pay $1,717 to courts.
  • Obligations of debtor: After filing Chapter 7 and debts are discharged, a person will be released from personal liability. In Chapter 11, the goal is to allow a company to become profitable again, which means that it will have some time to reorganize and create a repayment plan. After that, the filer must comply with the court-approved plan.

There are also some similarities between the two types of bankruptcy. For instance, whether you file for Chapter 7 or Chapter 11 bankruptcy, doing so will result in an automatic stay, which means creditors must stop trying to collect debts. It is also generally necessary to go through credit counseling whether you are filing Chapter 7 or Chapter 11 bankruptcy.

These are just a few examples of how Chapter 7 and Chapter 11 compare to each other. In order to get a better idea of what solution may be right for your specific situation, it can be vital to discuss your current circumstances and your financial goals with a bankruptcy attorney.

Source: United States Courts, "Chapter 11 - Bankruptcy Basics," accessed on Dec. 16, 2015

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