Definition
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is a legal process in which an individual’s or business’s assets are sold off to repay creditors. On the other hand, Chapter 11 bankruptcy, primarily used by businesses, is a reorganization bankruptcy that allows the debtor to keep their assets and restructure them to facilitate the repayment of debts. Both Chapter 7 and Chapter 11 provide a fresh start but via different routes.
Key Takeaways
- Chapter 7 bankruptcy, otherwise known as liquidation bankruptcy, is typically filed by individuals who are unable to pay their existing debts. It leads to the sale of the debtor’s assets (excluding some exempt property) by a trustee, and the proceeds are used to repay creditors.
- Chapter 11 bankruptcy, also known as reorganization bankruptcy, is usually filed by businesses that wish to continue their operations while simultaneously repaying creditors through a court-approved plan. It allows them to negotiate terms with creditors, shareholders, and employees to reduce the businesses’ debts, discharge part of its liabilities, or terminate contracts or leases.
- While Chapter 7 bankruptcy might be a quicker process, it may require the debtor to liquidate most of their assets. By contrast, Chapter 11 bankruptcy can be a more complex and expensive process, but it provides for the restructuring of debts and ongoing business operations which can be more advantageous for businesses over the long term.
Importance
The distinction between Chapter 7 and Chapter 11 bankruptcy is crucial as they cater to different needs and result in different outcomes for debtors. Chapter 7 refers to the liquidation bankruptcy, where a debtor’s assets are sold off to repay creditors.
This procedure, typically for individuals or businesses with limited assets, might result in the debtor being absolved of further obligation to debtors. On the other hand, Chapter 11, often used by corporations, allows entities to restructure their debts while remaining operational.
Under Chapter 11, a business can renegotiate its debts and formulate a payment plan while continuing to earn revenue. Understanding this difference determines who can apply for each type of bankruptcy and how it will affect their financial future.
Explanation
Chapter 7 and Chapter 11 bankruptcy are legal processes that provide relief to individuals and businesses struggling with unmanageable debt. However, they serve distinct purposes and are used in different circumstances. Chapter 7, often referred to as “liquidation bankruptcy,” is primarily geared towards individuals with an overwhelming amount of debt.
When an individual files for Chapter 7 bankruptcy, they agree to liquidate their non-exempt assets to repay creditors. The main purpose here is to discharge the individual from the obligation to repay their debts, giving them a proverbial ‘clean slate’, yet it may also lead to the loss of their physical assets. On the other hand, Chapter 11, commonly known as “reorganization bankruptcy,” is typically used by businesses that are unable to meet their financial obligations.
Instead of liquidating assets to pay off their debts, the business, under the supervision of a bankruptcy court, reorganizes and restructures its debts in a way that enables it to continue operations. This might involve altering payment terms, downsizing, or even modifying business operations. The primary aim of Chapter 11 bankruptcy is to allow the business to regain profitability, thereby protecting employees, stakeholders, and the economy at large.
Examples of Chapter 7 vs Chapter 11 Bankruptcy
**GM Bankruptcy (2009, Chapter 11):** General Motors, the U.S. automaker, filed for Chapter 11 Bankruptcy in 2009 following huge losses and cash drains. However, the company restructured its debt and obligations rather than liquidating its entire assets. Therefore, using Chapter 11, the company was able to reorganize, close factories, eliminate 40% of its dealerships, and shed its Pontiac, Saturn, Hummer, and Saab brands. GM emerged from bankruptcy protection shortly thereafter, with the U.S. government taking a 60% ownership stake in the new company.
**Enron Bankruptcy (2001, Chapter 11):** Enron Corporation, an American energy company, filed for Chapter 11 bankruptcy in December
Following one of the largest most complex bankruptcy cases in U.S. history, the company was able to reorganize by selling off assets and restructuring its operations. Parts of Enron are still operating as a part of different entities today, underlining the restructuring aspect of Chapter
**Blockbuster Bankruptcy (2010, Chapter 7):** Video rental company Blockbuster filed for Chapter 11 bankruptcy in 2010 hoping to shed its high debt load and escape escalating rental fees. However, after an attempt at restructuring failed, its assets were sold to Dish Network and it was forced into Chapter 7 liquidation in
Blockbuster’s remaining assets were auctioned off, movie rental stores were closed, and the company ceased to exist as it once was, showcasing the finality and total liquidation that comes with Chapter 7 bankruptcy.
Frequently Asked Questions: Chapter 7 vs Chapter 11 Bankruptcy
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy, also known as liquidation bankruptcy, involves the selling of a debtor’s non-exempt assets by the trustee. The proceeds are then distributed to the creditors. This chapter of bankruptcy is typically used by individuals who have little or no disposable income.
What is Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy, also known as corporate bankruptcy, is primarily for businesses. It allows them to continue their operations while restructuring and paying their debts under a court-supervised plan. Individuals, whose debts exceed Chapter 13 bankruptcy limits, can also file Chapter 11 bankruptcy.
Who can file for Chapter 7 and Chapter 11 Bankruptcy?
Both individuals and businesses can file for Chapter 7 bankruptcy, but they need to pass a means test if they are individuals. For Chapter 11 bankruptcy, it is primarily for businesses. In some rare cases, individuals can also file for Chapter 11, especially when their debts are considerably large.
What are the main differences between Chapter 7 and Chapter 11 Bankruptcy?
Chapter 7 bankruptcy involves liquidation of assets to pay off debts, whereas Chapter 11 involves restructuring of debts, allowing a business to pay off its debt while continuing its operations. Chapter 7 bankruptcy is typically quicker to complete than Chapter 11, and it does not require the filer to make a repayment plan.
Can debts be discharged in Chapter 7 vs Chapter 11 Bankruptcy?
Yes, in both Chapter 7 and Chapter 11 bankruptcies, debts can be discharged. However, the timeline and the type of debts that can be discharged varies between these two chapters. It is advised to consult a bankruptcy attorney to understand which type of bankruptcy is suitable for your specific circumstances.
Related Entrepreneurship Terms
- Bankruptcy Code
- Liquidation
- Debt Restructuring
- Bankruptcy Trustee
- Debtor in Possession
Sources for More Information
Sure, here are four reliable sources of information on Chapter 7 vs Chapter 11 Bankruptcy:
