Chapter 11 vs. Chapter 7 Bankruptcy
Depending on the type, or “chapter,” of bankruptcy, debts are treated differently. In Chapter 11 bankruptcy, debts are restructured in a way that debt repayment becomes more achievable. In Chapter 7 bankruptcy, which is the most common form of bankruptcy, many debts are forgiven, and a variety of personal assets are sold — liquidated — to repay as many remaining debts as possible. In general, Chapter 11 bankruptcy is utilized by corporations and other business owners, while Chapter 7 bankruptcy is favored by individuals.
There are 4 types of bankruptcy filings in the Federal Bankruptcy Code (Title 11 of the United States Code):
- Chapter 7 – Liquidation
- Chapter 11 – Reorganization (or Rehabilitation bankruptcy)
- Chapter 12 – Adjustment of Debts of a Family Farmer with Regular Annual Income
- Chapter 13 – Adjustment of Debts of an Individual with Regular Income
The main difference between Chapter 7 and Chapter 11 bankruptcy is that under a Chapter 7 bankruptcy filing, the debtor’s assets are sold off to pay the lenders (creditors) whereas in Chapter 11, the debtor negotiates with creditors to alter the terms of the loan without having to liquidate (sell off) assets.