What Are the Pros & Cons of Chapter 7 Versus Chapter 11 Bankruptcy?

Under federal law, individuals and business owners who cannot pay their bills as agreed have the legal right to file for bankruptcy. Chapter 7 allows individuals or business owners to permanently eliminate many of their pre-existing debts, according to author Stephan Elias in “How to File for Chapter 7 Bankruptcy.” On the other hand, a Chapter 11 case allows a struggling business owner to partially repay personal and corporate debts.

Similarities

No matter what type of bankruptcy you file, you must submit completed forms detailing your assets and liabilities to the nearest branch of the United States Bankruptcy Court. Lying on any type of bankruptcy form is a crime punishable by hefty fines and even federal imprisonment, warns “How to File for Chapter 7 Bankruptcy.” Also, filing bankruptcy is a permanent public record that anyone with interest can access at any time in the future.

Business Chapter 7

If you’re a business owner and file Chapter 7, you essentially close your company, warns the U.S. Securities and Exchange Commission. Business Chapter 7 does not cover your personal debts or affect your personal assets. A bankruptcy trustee sells any business assets you own and distribute the proceeds to your creditors. In corporate bankruptcy, the trustee pays any banks to which you owe money before considering the financial needs of your stockholders.

Personal Chapter 7

Filing personal Chapter 7 eliminates many of your pre-existing debts, but negatively impact your credit rating for 10 years, warns the book “How to File for Chapter 7 Bankruptcy.” Also, your bankruptcy trustee can sell some of your personal assets and distribute any profits to your creditors. Whether you can keep a house or similar property depends upon your state of residence. If you earn more than your state’s annual median income level, you likely need to request a partial personal debt repayment plan under Chapter 13. You do not need an attorney to file personal Chapter 7 or Chapter 13.

Chapter 11

Chapter 11 is the only type of bankruptcy under which you can partially repay business and personal debts and keep most of your assets. However, you must hire an attorney to file this type of bankruptcy. Your business might not survive Chapter 11 if you cannot get your finances in order, but some companies have risen above bankruptcy, according to the U.S. Securities and Exchange Commission.

References

• "How to File for Chapter 7 Bankruptcy"; Stephen Elias, et al.; 2009
• U.S. Securities and Exchange Commission: Corporate Bankruptcy
• U.S. Trustee Program: Census Bureau Median Family Income by Family Size