Differences between Chapter 11 Bankruptcy and Chapter 7 Bankruptcy
Contents
Chapter 11 Bankruptcy vs. Chapter 7 Bankruptcy[edit]
Chapter 7 and Chapter 11 are two distinct types of bankruptcy proceedings under the United States Bankruptcy Code.[1] The fundamental difference between them lies in their primary objective: Chapter 7 involves the liquidation of a debtor's assets to pay creditors, often leading to the cessation of business operations.[2] In contrast, Chapter 11 provides a path for businesses and, in some cases, individuals to reorganize their financial affairs, restructure debts, and continue operating.[2] The choice between these two chapters depends on the debtor's financial situation, assets, and long-term goals.[3]
Chapter 7, known as "liquidation bankruptcy," is typically used by individuals who cannot repay their debts and by businesses that see no viable future.[2] In a Chapter 7 case, a court-appointed trustee takes control of the debtor's non-exempt assets, sells them, and distributes the proceeds to creditors.[1] For individual debtors, many types of unsecured debts, such as credit card balances and medical bills, can be discharged, offering a "fresh start."[4] Businesses, however, do not receive a discharge and must cease operations upon filing.[2] Eligibility for individuals is often determined by a "means test," which compares their income to the state median to see if they have the means to repay their debts.[5]
Chapter 11, referred to as "reorganization bankruptcy," is most commonly utilized by corporations and partnerships, although individuals with substantial debt that exceeds the limits for other types of bankruptcy can also file. The primary goal of Chapter 11 is to allow the debtor to continue business operations while developing a plan to repay creditors over time.[2] The debtor typically acts as a "debtor-in-possession," maintaining control of their assets and business under court supervision. This process allows a company to restructure its finances, negotiate with creditors, and potentially emerge as a profitable entity.[3] The debtor proposes a reorganization plan, which creditors vote on, and must be confirmed by the court to become effective.
Comparison Table[edit]
| Category | Chapter 7 | Chapter 11 |
|---|---|---|
| Primary Goal | Liquidation of assets to pay creditors. | Reorganization of debts to continue operations. |
| Who Can File | Individuals, partnerships, and corporations. | Individuals, partnerships, and corporations. |
| Business Operations | Cease upon filing.[2] | Continue under court supervision.[2] |
| Control of Assets | A court-appointed trustee takes control of non-exempt assets. | The debtor typically remains in control as a "debtor-in-possession." |
| Debt Outcome | For individuals, eligible debts are discharged. For businesses, assets are liquidated with no discharge.[4] | A reorganization plan is created to repay creditors over time. |
| Typical Duration | Generally 4 to 6 months for individual cases. | Can take several months to years to complete.[3] |
| Complexity and Cost | Simpler and less expensive. | More complex and significantly more costly. |
Liquidation under Chapter 7[edit]
The Chapter 7 process begins with the filing of a petition with the bankruptcy court. An automatic stay goes into effect, which halts most collection actions against the debtor. A trustee is appointed to oversee the case, and they are responsible for gathering and selling the debtor's non-exempt property. Debtors are allowed to keep certain "exempt" property, the specifics of which vary by state law. After the non-exempt assets are liquidated, the proceeds are paid to creditors according to a priority system established in the Bankruptcy Code. Individual debtors typically receive a discharge of their eligible debts within 60 to 90 days of the creditors' meeting.
Reorganization under Chapter 11[edit]
A Chapter 11 case also starts with the filing of a petition, which triggers an automatic stay. Unlike Chapter 7, the debtor usually continues to operate their business as a "debtor-in-possession" with the powers and duties of a trustee. The debtor has an exclusive period, typically 120 days, to propose a plan of reorganization. This plan details how the business will operate and how it will pay its creditors over time. The plan must be approved by a vote of the creditors and confirmed by the bankruptcy court. The confirmation of the plan creates a new contractual relationship between the debtor and its creditors. Chapter 11 is a more intricate and lengthy process than Chapter 7, often involving significant legal and administrative costs.
References[edit]
- ↑ 1.0 1.1 "uscourts.gov". Retrieved January 07, 2026.
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 "investopedia.com". Retrieved January 07, 2026.
- ↑ 3.0 3.1 3.2 "uscourts.gov". Retrieved January 07, 2026.
- ↑ 4.0 4.1 "scura.com". Retrieved January 07, 2026.
- ↑ "investopedia.com". Retrieved January 07, 2026.
