A Closer Look at Chapter 7 vs. Chapter 11 Bankruptcy

While “filing for bankruptcy” may seem like a terrifying ordeal, you may be surprised to know that in a legal context, it is quite common and essentially an administrative function. Indeed, nearly 800,000 individuals and businesses in the U.S. filed for bankruptcy in 2016. That is more than 2000 a day!

If you think, predict, or have concluded that filing for bankruptcy is in your best interest – since in addition to eliminating certain debts it will stop aggressive debt collectors, enable you to keep protected property, and avoid taxes on cancelled debt – then your next step is to determine which Chapter is appropriate for your situation.

Obviously, your bankruptcy lawyer will provide you with specific advice and guidance based on the unique details of your scenario. However, in a general sense, we can take a closer look at two of the most common filings: Chapter 7 vs. Chapter 11 bankruptcy.

Key Facts About Chapter 7 Bankruptcy

Also known as “liquidation bankruptcy” and “straight bankruptcy,” Chapter 7 bankruptcy cancels out most of your unsecured debts. However, it will not discharge debts related to child support, spousal support, student loans ( in most cases ), fines or penalties for violating the law, federal/state/local taxes owed, any debts arising from fraud or criminal restitution. What’s more, any debts that are not listed on bankruptcy papers at the time of filing will not be discharged.

You can apply for Chapter 7 bankruptcy provided that within the last six months you did not have another petition dismissed by the courts because of error or omission on your part (i.e. not showing up to court, not complying with court orders, etc.).

Your filing will need to include a comprehensive schedule of assets and liabilities, along with details on your income, expenses, overall financial picture, leases, contracts, and agreements.

Once your petition is filed, your creditors must cease any aggressive attempts to collect debts. They must also halt any lawsuits or wage garnishment action (or threats to do either). In fact, they cannot even phone you directly.

The next step is a meeting of creditors, which happens within 60 days of filing. During this meeting, the court appointed Bankruptcy Trustee will ask you questions to ensure that you understand the impact and consequences of filing for bankruptcy. Your creditors may also attend this meeting, although they are not legally required to do so.

Provided that the process moves forward, your non-exempt assets will be surrendered to the court (by way of the Bankruptcy Trustee), and they will be liquidated to pay your creditors an agreed upon amount (e.g. 50 cents on the dollar, etc.).

Key Facts About Chapter 11 Bankruptcy

Chapter 11 bankruptcy is typically pursued by businesses rather than individuals, and it allows you to continue operating your business during the proceedings vs. shutting it down.

Once a petition is filed, the court appointed Bankruptcy Trustee appoints committees, which represent the interests of creditors, bondholders and shareholders. As with a Chapter 7 filing, you cannot submit a petition if within the last six months a previous petition was rejected due to an error or omission on your part.

Together, the committees work with you (and of course your bankruptcy lawyer) to develop a plan that reorganizes your debt in an acceptable manner. If all of the committees agree with the plan, then it is submitted to the court for confirmation. However, even if one or more committees reject the plan, the court may still confirm it.

Once the plan is confirmed, a more complete and comprehensive report must be prepared and filed with the court. Once this is approved, your business (under the auspices of the Bankruptcy Trustee) carries out the plan.

Which Filing Option is Right For You?

As noted above, the only way to determine which filing option is right for you is by working with an experienced and certified bankruptcy lawyer. He or she will ensure that you make decisions that are in your best short-term and long-term interest.

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