Chapter 7 vs. Chapter 11 Bankruptcy Differences

When dealing with Chapter 7 and Chapter 11 bankruptcies, the shareholders of the companies doing the filing are not likely to see returns on their investments. That said there are still some major differences. Read on to learn more.

Chapter 7 Bankruptcy

Also called “Liquidation Bankruptcy” At this stage firms are past the stage of reorganization and have to sell off any assets that are not exempt to satisfy creditors. Debts are collected according to “absolute priority” rules and a trustee make sure assets are sold and the funds distributed to the appropriate creditors. To obtain Chapter 7 relief a debtor may be an individual, a corporation or a small business. They are not allowed to proceed with bankruptcy if they have had a previous bankruptcy application dismissed within the previous 180 days should they not have made an appearance in court. When assets are sold the remaining debt is usually forgiven.

Chapter 11 Bankruptcy

Also called a “reorganization” or sometimes a ‘rehabilitation” bankruptcy. Available for nearly everyone, there is no debt limit and no income requirements. It is more complex and generally more expensive. It permits the firm to reorganize their debt by contacting its creditors to change the loan terms. It is initiated with a petition filing and according to The Small Business Reorganization Act of 2019 makes this form of bankruptcy more accessible for small businesses. To quote the act: “defined as entities with less than about $2.7 million in debts that also meet other criteria,”  it goes on to state: “imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee who will work with the small business debtor and its creditors to facilitate the development of a consensual plan of reorganization.” Recently the Chapter 11 Subchapter V debt limit has been increased by President Donald Trump to $7,700,000 for cases filed following the CARES act.

Chapter 7 Vs. Chapter 11

Both Chapter 11 and Chapter 7 bankruptcy requires a trustee who will supervise the assets belonging to the debtor to ensure the continuation of business. In Chapter 11, debt is not absolved but if successful it is expected the business will continue to operate. When that is not possible the next step is liquidation and Chapter 7 bankruptcy.

Source: https://www.investopedia.com/ask/answers/differences-between-chapter-7-and-chapter-11/