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Chapter 7 vs Chapter 11 Bankruptcy

Patrick Austin, J.D. | September 10, 2024

Patrick Austin
Attorney from George Mason
Patrick Austin, JD

Patrick Austin is a licensed attorney with a background in data privacy and information security law. Patrick received his law degree at George Mason University's Antonin Scalia Law School, where he served as the Editor-in-Chief for the National Security Law Journal.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Chapter 7 and Chapter 11 are two different forms of bankruptcy. In a Chapter 7 bankruptcy, assets are liquidated to pay creditors, with secured debts taking priority over unsecured debts. In contrast, Chapter 11 bankruptcy allows people who do not qualify for Chapter 13 bankruptcy, or need specific protections that Chapter 11 affords, to reorganize their debt.

If you are struggling with a considerable amount of debt, you may be contemplating bankruptcy as a way to ease the financial burden and, possibly, get a fresh start for your financial future. If you opt to pursue filing for bankruptcy, the question becomes - what type of bankruptcy? And what is the difference between Chapter 7 vs Chapter 11? What should I consider when deciding Chapter 7 vs Chapter 11?

Generally speaking, the type of bankruptcy you select will depend largely on factors such as your current income, your future goals, and whether you are seeking a personal or business bankruptcy.

Below, we'll explain the difference between Chapter 7 and Chapter 11 bankruptcy and everything you should know about both.

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What is Chapter 11 vs Chapter 7?

Chapter 11 bankruptcy, which is found in Title 11 of the United States Code (i.e., part of the U.S. bankruptcy code), is a complex and costly form of bankruptcy, which is why it is typically used for business entities rather than individuals. Unlike Chapter 7, the Chapter 11 bankruptcy chapter provides a company an opportunity to reorganize its debt and try to reemerge as a healthy business.

Nevertheless, individuals retain the option to file for Chapter 11, especially in the event someone does not qualify for Chapter 13 bankruptcy, or requires special protections that are available under Chapter 11. For example, if an individual is seeking assistance with reorganizing their debts, such as making up for missed mortgage payments, restructuring debt on investment property, or paying down credit card and/or medical debt, then Chapter 11 may be worth considering.

In contrast, Chapter 7 bankruptcy is a bankruptcy option for individual debtors. It allows individuals to wipe out many types of unsecured debt while retaining certain possessions.

Most people opt to file for Chapter 7 bankruptcy in an effort to get rid of debts they are unable to pay. In the event there is no objection to your Chapter 7 bankruptcy petition, the court will proceed with discharging your debts. This is an important difference from a Chapter 13 bankruptcy case, where a court generally approves a repayment plan for a portion of your debts.

When you file for Chapter 7 bankruptcy, you need to be prepared to identify unsecured and secured debts. For context, secured debts are loans and debts secured by real property or other assets. For example, a mortgage is a secured debt while credit card balances and medical bills are forms of unsecured debt.

The graphic below summarizes the difference between Chapter 7 and Chapter 11 bankruptcy:

Chapter 7 vs Chapter 11 Bankruptcy

Some debts cannot be eliminated through bankruptcy

It is important to note that there are certain types of debt that cannot be discharged through bankruptcy. There are rare exceptions, depending on the specific facts in an individual case. Nevertheless, below is a list of debts that generally do not qualify for discharge:

  • Alimony
  • Child support
  • Debts for a personal injury or wrongful death judgment stemming from an accident you caused while driving under the influence.
  • Student loans (unless you can substantiate undue hardship)
  • Unpaid taxes

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Things you needs to know before filing for bankruptcy

Any type of bankruptcy, including Chapter 7 and Chapter 11, will provide a level of debt relief through an automatic stay (i.e., creditors are prohibited from contacting you as soon as your bankruptcy case is filed). An automatic stay will also halt any wage garnishment efforts.

Gather Documents

When initiating your bankruptcy filing, there is a litany of financial records, bank statements, and related materials that you will need to compile and organize. Some of those materials include:

  • Six months of pay stubs or other proof of your income
  • Documents pertaining to your assets, debts, or income
  • Six months of pay stubs or other proof of your income
  • Two years of state and federal tax returns
  • Six months of pay stubs or other proof of your income
  • Six months of pay stubs or other proof of your income
  • Recent bank account statements
  • Recent retirement account or brokerage account statements
  • Real estate valuations or appraisals
  • Copies of vehicle registration

You will need this information to complete your bankruptcy forms completely and accurately (more on this below).

Take a credit counseling course

All bankruptcy filers are obligated to take a credit counseling course from an approved provider. Filers must take the course in the six months prior to filing a bankruptcy petition (which opens the case) with the Bankruptcy Court. Please be advised that the credit counseling course has to be taken through a credit counseling agency that is formally approved by the Department of Justice.

When you complete the course, you will receive a certificate of completion. Make sure to retain this certificate since bankruptcy laws require you to provide a copy of this certificate to the court when you file your bankruptcy forms.

Complete various bankruptcy forms

It is important to be prepared to fill out a plethora of forms and documents when going through the bankruptcy process. For example, there are more than 20 required forms and some forms are several pages long. This means your total bankruptcy petition could be 70 pages or more, depending on your situation.

Bankruptcy forms will ask for information about your income, your spending habits, what you own, and what you owe. This information is necessary to help the trustee and bankruptcy judge understand your financial circumstances and whether you are eligible to file for bankruptcy.

Pay the filing fee or request a waiver

There is a $338 filing fee to file for Chapter 7 bankruptcy proceedings. Filing for Chapter 11 bankruptcy is even more expensive. There is a $1,167 case filing fee and a $571 miscellaneous administrative fee. This means, in total, the fees to file for Chapter 11 bankruptcy are $1,738.

These fees are typically due when you file your bankruptcy petition with the court.

If you don’t have the funds to pay the filing fee now, you may be able to apply to pay the fee in installments, after your case has been filed. If you are unable to afford to pay installments, you may be able to apply for a fee waiver. To qualify, your total household income must be below 150 percent of the federal poverty line.

Key Takeaways

If you are an individual or a small business owner thinking about filing bankruptcy, it is important to figure out which type of bankruptcy makes the most sense for your situation and affords bankruptcy protection. This is why it is understandable to assess which is best - Chapter 7 vs Chapter 11. Here are some key takeaways:

  • Both Chapter 7 and Chapter 11 provide debt relief and payment to creditors.
  • Chapter 7 may be more advantageous to a business owner since it affords the option to close the business entirely and start fresh.
  • Chapter 11 bankruptcy allows a company to continue operating, while under court supervision.

Filing for bankruptcy, whether it is Chapter 7 or Chapter 11, is a multi-step process that involves compiling significant amounts of paperwork, taking a credit counseling course, and paying a filing fee. It is important to go in with your eyes open to the bankruptcy process and be prepared.

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