Chapter 7 is the most common form of consumer bankruptcy. It’s called “liquidation” because it involves selling off assets (property) in order to repay debts. A trustee is appointed by the court, which sells your property and distributes the money to creditors. People file for Chapter 7 when they can no longer pay their bills. Read more: What Is Chapter 7 Bankruptcy?
The fact that many big businesses are allowed to go through Chapter 11 (reorganization) when filing for bankruptcy might lead some people to believe that this option is better than settling debts with a Chapter 13 plan that may require them to give up at least some of their possessions. However, that’s not necessarily true; even though many small businesses choose Chapter 11 over Chapter 7, there are a few things you should be aware of before deciding to file for bankruptcy.
What’s the difference between filing for Chapter 11 and filing for Chapter 13?
- In both cases, the person filing is seeking protection from creditors while arranging their finances in an orderly fashion; each option has its pros and cons.
- Chapter 11 bankruptcies allow your business to continue operating as it liquidates assets (property) in order to repay debts. This can involve selling some property (inventory, equipment, etc.) but not all of it; you must pass a “meets and bounds” test that proves that liquidating would cause too many problems at your establishment (for example, if your store sells expensive electronic equipment, selling it would likely harm business more than help). Creditors are not paid in full under this type of bankruptcy, but they are offered better terms. All debts that were incurred prior to the filing date must be re-paid in full once the Chapter 11 plan is complete, but any new debt incurred after the filing date need only be repaid under a “plan payment” schedule says Peter DeCaprio. Reorganization plans can last up to five years, but must be approved by creditors and filed with the court; you must also pay all fees related to your case (this can delay proceedings if fees aren’t fully paid upfront).
- Chapter 13 offers an even longer repayment period than Chapter 11 at five years or less (depending on income) with lower filing fees. A Chapter 13 filing requires a repayment plan to be submitted to the court and creditors within 90 days of the filing date that details how much you can afford to pay them each month, but this plan must also be approved by creditors. Any new debts incurred after the filing will have to be repaid under this plan as well. When you file for Chapter 13 bankruptcy, your nonexempt property must be used to repay debts in an amount equal to what other creditors would receive were you to file for Chapter 7 bankruptcy instead (more about exemptions below).
- Unsecured debt includes any bill that does not have collateral associated with it; credit card bills, medical costs and personal loans are all examples of unsecured debt. Your unfiled income taxes from the year before you file, student loans and alimony or child support all qualify as secured debt since they are backed by assets that can be seized to pay them off if necessary.
- Chapter 7 bankruptcy is a good option for people with lower incomes who want protection from creditors immediately. Both Chapter 11 and 13 offer more financially-stable filers the opportunity to repay bills over time while still operating their business, but this option is only available to those with enough disposable income to stay afloat without help from the court. A Chapter 7 filing will remain on your credit report for up to 10 years but has less of an impact on your credit score than a foreclosure or repossession does. You cannot file for Chapter 11 or 13 bankruptcies again for six years after completing your original repayment plan, but you can file for Chapter 7 bankruptcy immediately after completing it.
Conclusion by Peter DeCaprio:
As you can see, filing for Chapter 11 bankruptcy will allow you to operate your business as usual but requires a strict repayment plan. This type of bankruptcy would be more appropriate if you still have enough income left over after paying taxes and living expenses to maintain the same standard of living during the bankruptcy proceedings; it’s also good for people who are able to sell all their property without detrimentally affecting the business.