Chapter 11 vs Chapter 7: Key Differences

Chapter 11 and Chapter 7 are two distinct types of bankruptcy filings under the U.S. Bankruptcy Code, each serving different purposes and offering different outcomes for debtors.

Chapter 11: Reorganization Bankruptcy

• Purpose: Chapter 11 is primarily used by businesses to reorganize their debts and continue operating under court supervision. 12
• Key Features:
  • Allows businesses to restructure debts and operations.
  • Provides protection against creditor actions through an automatic stay.
  • The debtor typically remains in control of the business as a "debtor in possession" unless a trustee is appointed. 26
• Outcome: The goal is to emerge from bankruptcy as a viable business, with a reorganization plan that must be approved by creditors and the court. 47

Chapter 7: Liquidation Bankruptcy

• Purpose: Chapter 7 involves the liquidation of a debtor's non-exempt assets to pay off creditors. 38
• Key Features:
  • Involves the sale of non-exempt assets by a court-appointed trustee.
  • Provides a fresh start by discharging most debts, but certain debts like student loans and tax obligations are typically not dischargeable. 38
• Outcome: The business ceases operations, and assets are sold to pay creditors, with any remaining debt generally forgiven. 38

Key Differences

• Purpose: Chapter 11 focuses on reorganization, while Chapter 7 focuses on liquidation.
• Control: In Chapter 11, the debtor typically remains in control, whereas in Chapter 7, a trustee administers the assets.
• Outcome: Chapter 11 aims to restructure debts and continue business operations, while Chapter 7 results in the closure of the business and the sale of assets. 47