In the U.S., bankruptcy is a process that businesses, municipalities, or individuals go through to get rid of or restructure debts. There are 6 different types of bankruptcies, known as “Chapters,” which refer to their specific chapters in the Federal Bankruptcy Code. Each one has a unique process based on the entity entering into it and the desired outcome. The most common chapters for businesses are Chapters 7 and 11. So what’s the difference between Chapter 7 vs Chapter 11 bankruptcy, and which one is a better choice for your business?
Chapter 7 vs Chapter 11 Bankruptcy
Here’s a breakdown of Chapter 7 and Chapter 11 bankruptcy so you can learn more about your options.
Chapter 7: Orderly Liquidation of Property
Chapter 7 bankruptcy is when an individual or business goes through a process where their assets are assessed and liquidated. Creditors then get paid from the proceeds from that liquidation. If a business is filing for Chapter 7, they will also go out of business as a result.
Chapter 11: Business Reorganization
Chapter 11 bankruptcy offers more options. When a business files for Chapter 11 bankruptcy, they want to stay in business and are looking to restructure the money they owe so they can recover. Through this process, the entity works to renegotiate the amounts they owe and the terms of payment (interest rates and duration) with the assistance of the courts.
Prior to the Small Business Reorganization Act (SBRA) of 2019, the Chapter 11 Bankruptcy process was realistically only available to larger businesses due to the complexity of both filing and complying with the ongoing efforts after completion. Thanks to the SBRA, Chapter 11 is now both less complex and less expensive, making it more available to small business owners.
So how does the process work and who qualifies? These resources will show you the way.
- A Complete Guide to the Small Business Reorganization Act of 2019
- US Courts: Chapter 11 Bankruptcy Basics