Individuals and companies may file under Chapter 7 vs Chapter 11 bankruptcy of the bankruptcy code. The chapter of filing you choose to file for bankruptcy relief depends on several factors, including your goal for filing bankruptcy. In this article, we discuss the difference between Chapter 7 and Chapter 11 cases. We also discuss some of the requirements for filing Chapter 11 and Chapter 7.
Differences Between Chapter 7 vs Chapter 11 Bankruptcy
Liquidation vs. Reorganization
One of the major differences between Chapter 7 and Chapter 11 bankruptcy is attorney fee cost. Chapter 7 bankruptcies often cost between $1500-$2500 in attorney fees while a Chapter 11 bankruptcy can cost upwards of $25,000 – $40,000 in attorney fees. Feel free to take the Chapter 7 calculator below to estimate qualification and cost.
Chapter 7 Individual Cases
Individuals may file under Chapter 7 or Chapter 11 of the Bankruptcy Code. If an individual files under Chapter 7, he or she must meet the income qualifications for Chapter 7 to qualify for Chapter 7 bankruptcy. You can take the Chapter 7 calculator below to estimate qualification and cost.
Chapter 7 bankruptcy cases are for individuals who do not have enough disposable income to repay their debts. Disposable income is how much money you have each month left over after paying reasonable living expenses.
Do you lose belongings?
When a person files bankruptcy under Chapter 7, the Chapter 7 trustee may seize and sell any non-exempt property. Non-exempt property is assets that have equity that exceeds the allowed bankruptcy exemptions. Equity is calculated by subtracting valid liens secured by the property and the allowable bankruptcy exemption from the fair market value of the property. The amount of each bankruptcy exemption depends on whether a debtor may use federal or state bankruptcy exemptions. A debtor’s residence for the two years preceding the filing of the Chapter 7 petition determines the bankruptcy exemptions the debtor may claim.
Most Chapter 7 cases filed by individuals are no-asset cases. In a no-asset case, the Chapter 7 trustee abandons (does not sell) any of the debtor’s property. The Chapter 7 case is complete in about four to six months after filing. The debtor receives a bankruptcy discharge (debt forgiveness) for most unsecured debts. Student loans, most tax debts, debts owed to the government, alimony, and student loans are not forgivable in bankruptcy.
An individual filing Chapter 7 could lose property that secures a loan, such as a mortgage or a car title loan. If the debtor cannot afford to pay the mortgage payments or car loan payments, the creditor may recover the collateral in satisfaction of the debt.
Chapter 11 Individual Cases
Individuals may also file under Chapter 11. The requirements and complexities of an individual Chapter 11 case are the same as a business Chapter 11 case. Therefore, most individuals who desire to restructure their debts do so under a Chapter 13 bankruptcy plan.
However, some individuals may owe debts that exceed the Chapter 13 debt limits of:
- $419,275 for liquidated, noncontingent unsecured debts
- $1,257,850 for liquidated, noncontingent secured debts
For those individuals, a Chapter 11 bankruptcy case is the only way to restructure their debts. Individuals who have substantial income and assets typically file chapter 11 cases. The Chapter 11 process is not cost-effective or efficient for most individuals.
Chapter 7 Business Cases
When a business files a Chapter 7 bankruptcy case, the business closes. Secured creditors, parties who hold a lien on collateral, receive their collateral. The Chapter 7 trustee sells the remaining assets and uses the funds to pay the company’s unsecured creditors. The Chapter 7 trustee assumes control of all business assets on the date the business files a bankruptcy petition.
Chapter 11 Business Cases
Businesses that desire to remain open, but need assistance restructuring their debts, can file under Chapter 11. The party filing Chapter 11 remains in control of the assets of the business, and the business continues operating during the bankruptcy case. There are specific Chapter 11 guidelines that all Chapter 11 debtors must follow.
Understand Chapter 11 Subchapter 5
The subchapter 5 has become a more streamlined approach to the Chapter 11 bankruptcy. Businesses with less debt can utilize this subchapter to receive some benefits from Chapter 11. It can be a smoother process that will lead to a Chapter 11 plan confirmation. If you are interested, you can check out an example Subchapter 5. You can also take the Chapter 11 calculator below.
Finally, you may also compare Chapter 13 bankruptcy to Chapter 11 Subchapter 5.
Understand the Chapter 11 Process
Chapter 11 bankruptcy is a complex reorganization that requires a debtor (the party that files for bankruptcy relief) to file a detailed Disclosure Statement. They will provide creditors and parties with interest details about the business, including the history of the business, assets, income, liabilities, and business affairs. The Disclosure Statement is intended to provide sufficient information to parties so that they may vote for or against the Chapter 11 plan. Some bankruptcy courts have local forms that Chapter 11 debtors can use to prepare the Disclosure Plan.
The debtor also files a detailed Chapter 11 Plan of Reorganization. a Chapter 11 plan is much more detailed. It contains descriptions of the classes of claims and how creditors within each class will be paid. Creditors vote in favor of or against the Chapter 11 plan. The plan cannot be confirmed without creditor participation.
In some cases, the court may appoint Creditors’ Committees charged with investigating the debtor’s conduct, participate in the administration of the case, and participate in drafting a Chapter 11 plan. In some Chapter 11 cases, creditors may file competing plans for consideration.
Confirmation of the Chapter 11 Bankruptcy Plan
Chapter 11 cases typically involve the filing of numerous motions, including motions to use cash collateral, value assets, assume or reject leases, and continue or cancel contracts. Creditors may file motions to dismiss, convert the case to Chapter 7, or modify the automatic stay to obtain collateral.
A debtor may remain in Chapter 11 for years. Business Chapter 11 cases can be very complex. It could take more than a year to confirm a Chapter 11 plan. During that time, the debtor must pay quarterly fees and file monthly reports.
Upon the confirmation of the Chapter 11 plan, the debtor is discharged from any debt incurred before the date of confirmation. The Chapter 11 plan creates a new contract with the debtor’s creditors. If the debtor fails to make the payments required by the Chapter 11 plan, creditors can take certain actions to collect the debts or protect their rights in collateral securing loans.
Small businesses and businesses that own a single asset may file a streamlined Chapter 11 case that is not as complex as a regular Chapter 11 case.
Chapter 7 vs Chapter 11 Filing Fees and Costs
The filing fees and costs for Chapter 7 and Chapter 11 cases are vastly different. The filing fee for a Chapter 7 case is $335 compared to $1,717 for a Chapter 11 case. Also, debtors in Chapter 11 must pay quarterly fees to the United States Trustee. The Chapter 11 quarterly fee is calculated based on the disbursements during the three-month calendar quarter. A minimum of $325 is due each quarter, even if no disbursements are made during the quarter.
Attorneys’ fees for a Chapter 7 case depends on the complexity of the case, the attorney, and the region in which the case was filed. Chapter 7 attorneys’ fees average between $1,000 and $1,750. On the other hand, the average attorneys’ fees for a Chapter 11 bankruptcy case can range from $10,000 to $25,000 for a small Chapter 11 case to $50,000 for a medium-sized Chapter 11 case. Large, complex Chapter 11 cases involving multi-million dollar corporations or individuals could be as high as $100,000 to $500,000.
Other Things to Consider:
Some individuals and companies can file for Chapter 7 without an attorney. The process for a simple Chapter 7 liquidation case is fairly straightforward. The largest concern for individuals filing Chapter 7 without an attorney is the loss of property. Ascend has a free Chapter 7 Means Test Calculator and a Chapter 7 Guide if you want to explore Chapter 7 in greater detail.
However, Chapter 11 cases may require the assistance of an experienced Chapter 11 lawyer. A Chapter 11 reorganization is a complex process. It is much more complicated than a Chapter 7 or Chapter 13 case. The rules and requirements for a Chapter 11 case can confuse an attorney who does not have experience handling these types of bankruptcy cases, so it can definitely be overwhelming for an individual who has no legal experience or knowledge of the bankruptcy system. If you believe you need to file Chapter 11 It is that you talk to a Chapter 11 bankruptcy lawyer.
If you need help finding a bankruptcy attorney or have questions about Chapter 7 or Chapter 11, contact Ascend by calling 833-272-3631.