Chapter 7 vs. Chapter 11 Bankruptcy

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When faced with debt and the inability to pay back all creditors, American citizens or businesses are able to file for bankruptcy based on their financial situation. Chapter 7 bankruptcy is, in general, an overall liquidation of assets, while Chapter 11 bankruptcy is a basic reorganization or rehabilitation bankruptcy. Chapter 7 bankruptcies often result in a Chapter 7 Trustee attempting to sell off a Debtor’s assets to pay off creditors, while Chapter 11 leaves an individual or corporation in control of their assets and allows them to negotiate with creditors to alter or cure the loan payment terms, in an attempt to have debts paid back without forcing a liquidation of assets.

Below is a chart of differences between Chapter 7 and Chapter 11 bankruptcies:

Bankruptcy Name Chapter 7 Bankruptcy Chapter 11 Bankruptcy
Bankruptcy Type Liquidation Reorganization
Who can file? Married, Single, and Businesses Married, Single, and Businesses
Is there a discharge of debts? Yes, in many cases an individual will no longer owe most or all debts shortly after bankruptcy by receiving a Chapter 7 discharge.Certain debts such as recent IRS and Franchise Tax Board debt or spousal support are typically nondischargeable.Unlike individuals, Corporations cannot receive discharges in Chapter 7. Yes, however, individual debtors must wait for some or all of their payments to be completed under their plan prior to receiving a discharge of their debtors.In Chapter 11 bankruptcy, the terms of loans or debts can be modified, allowing for repayment of debt at modified rates or terms rather than an immediate discharge of that debt.
Can loan terms be modified for property that is retained by the Debtor?  Usually not. In many cases yes.
Am I forced to sell my assets? Yes, if there is equity in assets that are not protected by exemptions.Assets can be sold subject to an individual’s exemptions which protect property.  Business debtors are not entitled to exemptions.Certain property is exempt. For example, some or all of the equity in the Debtor’s primary residence, funds in a 401K, and essentials like clothes can not be sold. No. Through reorganization, Chapter 11 bankruptcy typically allows you to keep assets. In theory, a corporation may file chapter 11 and still be run efficiently.Sometimes corporations or individuals file for chapter 11 in order to voluntarily sell assets with advantages that do not exist outside of bankruptcy.

Is Filing Bankruptcy Right For You?

While bankruptcy is a powerful financial tool, that helped over one million people last year, it is not the best course of action for everyone. Take a free bankruptcy evaluation, or talk to a Los Angeles bankruptcy lawyer for free, and find out if bankruptcy is right for you.