Definition of Chapter 7 Vs. Chapter 11
The United States Bankruptcy Code offers protection to debtors who are struggling financially. There are a number of bankruptcy chapters available, and two of the most common are Chapter 7 and Chapter 11. While these two chapters both offer debt relief, they function very differently. If you're considering filing for bankruptcy, it's important to understand how Chapter 7 and Chapter 11 work in order to determine which filing is appropriate for your situation.
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Function
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The function of a Chapter 7 bankruptcy is to allow debtors to eliminate their debts by liquidating their nonexempt assets and distributing the proceeds to their creditors. Chapter 7 bankruptcy essentially provides debtors with a clean financial slate. A Chapter 11 bankruptcy is designed to help struggling businesses reorganize so that they can continue to operate. In a Chapter 11 bankruptcy, debtors agree to repay their outstanding debts over time.
Eligibility
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The eligibility requirements for Chapter 7 and Chapter 11 vary slightly. According to the U.S. Courts, individuals and business entities may file for Chapter 7 protection, regardless of the amount of their secured or unsecured debt. You are required to fall within specific income guidelines to be eligible for Chapter 7.
Chapter 11 is typically used for corporations, partnerships or other business entities, although individuals may file as sole proprietors. There are no restrictions on income. As of 2010, small-business debtors filing Chapter 11 could have total outstanding debts of no more than $2,190,000. You are required to complete an approved credit counseling course at least 180 days prior to filing for either chapter.
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Fees
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You are required to pay a filing fee to file Chapter 7 or Chapter 11. As of 2010, the filing fee for a Chapter 7 case is $299, while a Chapter 11 case costs $1,039 to file.
Time Frame
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The time frame for a Chapter 7 filing is typically much shorter than that of a Chapter 11 petition. From your initial filing to the discharge, a Chapter 7 filing generally takes approximately six months to complete. A Chapter 11 case can take years to complete if the debtor and his creditors are unable to reach a satisfactory agreement for repayment.
Warning
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Filing for Chapter 7 or Chapter 11 can have a significant impact on your credit score. Either type of filing can remain on your credit report for up to 10 years, making it difficult to obtain new credit or loans. Filing bankruptcy also tends to carry a negative connotation; for businesses, this can potentially result in a loss of customer confidence. Unless you are proactive in improving your financial situation, bankruptcy may only be a temporary solution to your problem.
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References
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