What Are Chapter 7 and Chapter 11?
There are a number of different types of bankruptcy cases that can be filed in the United States. Two of the most common versions of bankruptcy are known by the section of the U.S. Bankruptcy Code in which they are found: Chapter 7 and Chapter 11. These different bankruptcy procedures have different net effects and end results. Both are widely utilized; however, Chapter 7 is the most common type of bankruptcy case filed. Chapter 7 pertains to liquidation or a debtor while Chapter 13 governs reorganization of a debtor.
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Chapter 7: Business
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A Chapter 7 bankruptcy can be filed on behalf of a business enterprise that is in serious financial condition and that is unable to meet its financial obligations to its creditors. Ultimately, under a Chapter 7 bankruptcy, the business will cease operations (although this may not occur immediately). A Chapter 7 Trustee will be appointed to oversee the operations of the business (if they will continue for any period of time). More significantly, the Trustee will undertake the sale of all of the assets of the business. The proceeds from the sale of the assets will be used in an effort to pay off some of the creditors owed money.
Chapter 7: Individual
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Individuals can file a Chapter 7 bankruptcy. Oftentimes this type of bankruptcy is referred to as "straight bankruptcy." This is made because a liquidation occurs as a result of this type of bankruptcy. A person will be relieved of a significant amount of her debt through this process. At a debtor's election, however, she can keep certain property through a bankruptcy with the understanding that any debt associated with that property will be paid. For example, an individual can keep her home and primary automobile, again provided the debtor agrees to pay the loan on these items.
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Chapter 11: Business Reorganization
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A Chapter 11 bankruptcy is designed to allow a business enterprise the ability to reorganize rather than liquidate. The ultimate goal of a Chapter 11 bankruptcy reorganization is to deal with the financial status of the business in such a way that its operations can continue and so that creditors will be in the best possible position to obtain at least part of the money they are owed. Chapter 11 bankruptcy is available to businesses of all types. This includes sole proprietorships, corporations, partnerships, limited liability companies and so forth. Individuals can make use of the provisions of Chapter 11 in some instances. However, when an individual wants to reorganize his personal debt, he normally will utilize the provisions of Chapter 13.
Revisions
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There have been some significant revisions to the U.S. Bankruptcy Code in recent years, specifically to Chapter 7. In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act took effect. This Act has the stated purpose of preventing consumer abuse of the bankruptcy laws. In simple terms, it has made certain types of consumer debt more difficult to discharge in bankruptcy. This includes credit card debt which historically made up a good portion of the debt most consumers sought relief from in a bankruptcy.
Credit Counseling
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The Act also mandates a consumer to seek credit counseling and budgeting assistance from a not for profit agency within a time period 180 days before filing for Chapter 7 bankruptcy. If the debtor does not complete such a course of action, and files for bankruptcy nonetheless, grounds exist for denying the debtor a discharge for his debts. This provision presently is considered "experimental." The effects are being examined to ascertain whether the counseling has an impact in reducing the number of bankruptcy filings.
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