We have all seen the ads on TV for lawyers looking to help you with Chapter 7 or Chapter 11 bankruptcy, but have you ever stopped to consider what they mean?

A clever way to remember the difference between these two chapters is:

  • In Chapter 7 bankruptcy, a business often shuts down
  • In Chapter 11 bankruptcy, a business remains open

Often, people who operate a business will have to file for bankruptcy. The process can be confusing, especially if you don’t understand bankruptcy rules, which could lead you needing a stop foreclosure attorney.

Learn more about Chapter 7 and Chapter 11 bankruptcy, and how it can affect your business.

What is Chapter 7 Bankruptcy?

The Chapter 7 bankruptcy process is also known as “liquidation.” As the reorganization phase has ended, those filing this type of bankruptcy must sell their assets to repay their debt.

Businesses that lack the income to cover their debts often file for this type of bankruptcy. Using the “absolute priority” rule, the courts appoint a trustee to supervise the debtors’ repayment.

Those that file Chapter 7 must pay off secured debts first, which are debts backed by collateral to reduce loan risk. For example, a business building purchased with the money from a loan issued by a bank, or another financial institution is a secured debt. The remaining assets and cash are distributed to unsecured creditors after secured creditors have been paid all of their claims.

A Chapter 7 bankruptcy is often the most effective way for individuals (particularly LLC owners) and small businesses to discharge their debts. In addition to Chapter 7, Chapter 13 is also an option available to individuals. In this type of bankruptcy, the courts supervised the debt to creditors be repaid within 3 to 5 years.

Are you fighting for your dream home due to filing a Chapter 7 bankruptcy? Hire a foreclosure attorney.

What is Chapter 11 Bankruptcy?

In bankruptcy, Chapter 11 is known as a reorganization bankruptcy. A company often goes through a “rehabilitation” phase during bankruptcy to recognize its debt and get back on its feet. If the court and creditors agree, an individual can restructure their debt in any way to keep their business open.

The filing of a chapter 11 bankruptcy case often begins with a petition filed in bankruptcy court. A petition can be filed by a debtor or creditor seeking payment of their debt. During this type of bankruptcy, the debtor can operate their business while undertaking steps to achieve financial stability.

Filing for Bankruptcy: What Are the Risks?

In Chapter 7 bankruptcy, you won’t be able to get rid of some types of debts. Taxes, student loans, alimony, and child support will still have to be paid during this period. If you file for Chapter 7 bankruptcy, you may lose your property, and your credit report is affected.

The negative bankruptcy information will remain on your credit report for ten years, and if you go into debt again, you will not be able to file for a Chapter 7 bankruptcy for eight years.

A Chapter 11 bankruptcy will impact your credit score for ten years, and it becomes a public record. In addition, it is pretty expensive to do, which is why mainly big businesses file for this type of bankruptcy.

Are Chapter 7 or Chapter 11 Bankruptcy Your Goal to Debt Relief?

If you fail to repay any debt you originally agreed to, it has a significant effect on your credit rating, and your choices can have a profound impact on your overall financial health. It is essential to research the appropriate steps and obtain reliable legal advice in the area before filing for Chapter 7 or Chapter 11 bankruptcy.