Difference Between Chapter 7 and Chapter 11 Bankruptcy
Chapter 7 of bankruptcy code is responsible for controlling the process of the liquidation of the assets where absolute priority rule are mentioned that stipulates the order according to which payment of the debt will be made whereas in case of Chapter 11 of 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 “chapter”. In this article, we look 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 LoansA secured loan is one where the borrower pledges his/her assets as a collateral to the issuer as a security. In the event of nonpayment of the loan, the issuer has the right to sell or transfer the secured property in order to recover the balance owed. if still some money left to the debtor then he pays unsecured loans like a credit card, unsecured personal loan, etc.
- Once a company or an individual file for this chapter the business shutdowns their operation and management of the business got dismissed. In simple words, the business gets closed after filing for this chapter. The company or individual is not able to continue its operation.
- After filing bankruptcy under this chapter, the court appoints one or more than one trustee 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 not sufficient to pay all debts. So, in this case, debtor pay only secured loans and ignores unsecured loans.
- The benefit of chapter 7 is that no repayment plan left and the debtor can start again from starting. There is no limitation on the amount of debt that the debtor needs to pay.
What is Chapter 11 Bankruptcy?
In this chapter restructuring debt, repayments take place. This way of filling bankruptcy helps in avoiding liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order. of assets. The debtor files bankruptcy under this chapter so that he or she can save their asset.
- The company or a business file for this chapter when the company is able to run its operation but not able to pay its debts. So this gives the chance to the company or an individual to stand again and run the business. There are some terms and conditions for filing Chapter 11 like a company should be able to 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 for reorganizing loan repayment and also to make some changes in terms and conditions of repayment terms.
- Through this debtor can manage their loan repayment in an efficient way. This also helps in the debtor to negotiate repayment plans with creditors. New terms and conditions form for both creditors and debtors regarding repayment of the loan.
Chapter 7 vs Chapter 11 Bankruptcy Infographics
Let’s see the top differences between chapter 7 vs chapter 11 bankruptcy.
The key differences are as follows –
#1 – Type
In Chapter 7 liquidation of assets takes place 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 and in chapter 11, the company get the chance to stand again and run its operations
Chapter 7 vs Chapter 11 Bankruptcy Comparative Table
|Chapter 7||Chapter 11|
|Liquidation of assets takes place||Restructuring of debt payment takes place|
|After the liquidation of assets payment made for secured loans then it 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 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.|
Both chapters have some advantages and disadvantages. It totally depends on the company’s owner how he or she wants to proceed.
- Chapter 7 – In this case, if the company must have to show that it is not able to run the operation. It depends on the company’s owners that 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 liquidation 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 business and they are not able to generate regular income then one cannot file for chapter 11 because the company may require some funds to run operations and for that company cannot ask for further debt.
This has been a guide to Chapter 7 vs Chapter 11 Bankruptcy. Here we also discuss the top 6 differences between these bankruptcies along with infographics and comparative table. You may also have a look at the following articles –