Question

what is the difference between a chapter 7 and a chapter 11 backrupcy action? what is usually included in the plannif reorganization field as part of a chapter 11 reorganization?

Answer 1

Chapter 7

Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy. Firms experiencing this form of bankruptcy are past the stage of reorganization and must sell off any nonexempt assets to pay creditors.In Chapter 7 the creditors collect their debts according to how they lent the money to the firm, also referred to as the “absolute priority.” A trustee is appointed, who ensures that any assets that are secured are sold and that the proceeds are paid to the specific creditors.

To qualify for chapter 7 relief, a debtor can be a corporation, an individual, or a small business. However, one is forbidden from filing for bankruptcy if within the previous 180 days another bankruptcy petition was dismissed due to the debtor’s failure to show up in court. A debtor likewise forgoes the right to file for bankruptcy if the debtor agrees to dismiss a former case after creditors asked the bankruptcy court to grant them the right to seize properties on which they hold the liens.

Chapter 11

Chapter 11 bankruptcy is also known as “reorganization” or “rehabilitation” bankruptcy. Nearly everyone can file for Chapter 11 bankruptcy, including individuals, businesses, partnerships, joint ventures, and limited liability companies (LLCs). There is no specified debt-level limit and no required income. However, Chapter 11 is the most complex form of bankruptcy and generally the most expensive. Thus, it’s most often used by businesses and not individuals.It’s much more involved than Chapter 7 because it allows the firm the opportunity to reorganize its debt and try to reemerge as a healthy organization. What this means is that the firm will contact its creditors in an attempt to change the terms on loans, such as the interest rate and dollar value of payments.

Chapter 7 vs. Chapter 11

Like Chapter 7, Chapter 11 requires that a trustee be appointed. However, rather than selling off all assets to pay back creditors, the trustee supervises the assets of the debtor and allows business to continue. It’s important to note that debt is not absolved in Chapter 11. The restructuring only changes the terms of the debt, and the firm must continue to pay it back through future earnings.If a company is successful in Chapter 11, it will typically be expected to continue operating in an efficient manner with its newly structured debt. If it is not successful, then it will file for Chapter 7 and liquidate.