Chapter 7 & Chapter 11 Bankruptcy Laws

There are some significant differences between Chapter 7 and Chapter 11 bankruptcy laws, due to the structure of the legal debt solution. Chapter 7 is available for both consumers and businesses but, since 2005 bankruptcy reform laws, it has become more difficult for individuals to file. Chapter 11 is primarily a corporate restructuring that does not necessarily dissolve a business, unlike corporate Chapter 7 cases.

Chapter 7 for Individuals

Individuals petitioning for Chapter 7, which dissolves virtually all consumer debts, must meet new criteria established in 2005. There was an increasing problem with people abusing Chapter 7 bankruptcy. Now, consumers who want a Chapter 7 discharge must make less than the median income for their state, and undergo credit counseling before their paperwork is accepted by the federal bankruptcy court. More consumers are being pressured into Chapter 13, which is a court-supervised debt repayment plan.

Chapter 7 for Businesses

Businesses that cannot pay their debts are able to file for Chapter 7 bankruptcy, and are not affected by the 2005 bankruptcy reform laws. Their assets are sold to offset creditor losses and it basically means the end of that corporate entity. Sometimes the bankruptcy trustee, a court-appointed liaison who ensures the paperwork is legitimate, sells the assets to other companies in an effort to reduce job losses resulting from a business Chapter 7 filing.

Chapter 11

Virtually all Chapter 11 cases are from businesses, though in some situations a sole proprietor or self-employed individual may opt to file Chapter 11. Chapter 11 allows a corporate restructuring and a court-supervised effort to repay some or all business debts. The court system can deem some contracts unfair and excuse the business from paying them. A business in Chapter 11 cannot be listed on a public stock exchange, and while it can stay in operation, most companies that undergo any form of bankruptcy eventually shut down.

Bankruptcy Reform Effects

Bankruptcy reform has not affected businesses, which is a controversial issue, especially since Enron Corporation had a well-known Chapter 11 case in 2001. Fraud accusations were rampant, and many people lost their retirement accounts. Critics state that the courts should be more worried about unscrupulous businesses rather than cash-strapped individuals. However, for the time being, it remains a result of bankruptcy reform that individual citizens wanting to declare bankruptcy are subject to more scrutiny and debate in their filings than businesses.

Non-Dischargeable Debts

The gap between business and consumer bankruptcy also relates to non-dischargeable debts. An individual filing bankruptcy is far more likely to have debts he is still responsible for than a business. People cannot discharge most back taxes, court fines, most student loan debts, or goods charged right before bankruptcy. However, there are cases where businesses have accrued obligations, knowing they were in serious financial trouble, and were still excused from paying them because of the way modern bankruptcy law is still more pro-business than pro-consumer.