How Is Bankruptcy Under Chapter 11 Different From A Case Filed Under Chapter 7 Or Chapter 13?

    Chapter 11 is the known at the Reorganization Chapter; Chapter 7 is called the Liquidation     Chapter; and Chapter 13’s title is Adjustment of Debts Of An Individual With Regular Income.

    As I wrote earlier the goal of a Chapter 11 Case is more often than not the rehabilitation of a troubled business entity, although individual filers are not uncommon.

    Chapter 7. In a chapter 7 case a trustee is appointed, who gathers and sells the debtor’s nonexempt assets for the benefit of the creditors. The notion of chapter 7 is that creditors of the same class will be treated equally; and the debtor, who will retain limited exempt assets, will get a fresh start.

    Chapter 13. Chapter 13 is similar to chapter 11, as the goal is for an individual debtor to confirm a plan that repays all or a portion of the debtor’s obligations. Chapter 13 is available only to individuals (no corporations, LLCs, or partnerships). An individual that operates a business as a sole proprietor (a dba is OK) may be eligible to file for bankruptcy under chapter 13.
    To be eligible to file under chapter 13 the individuals unsecured debts must not exceed $307,675 and the debtor’s secured debts may not exceed $922,975. These thresholds are periodically adjusted for inflation.

    Chapter 11. The goal of a chapter 11 cases is for a rehabilitated debtor to emerge from bankruptcy through the confirmation and implementation of a plan of reorganization. The plan is basically a contract between the various interested parties (creditors, debtor, secured lenders) that controls how the debtor’s affairs are to be conducted.

    An advantage of chapter 11 is that by allowing an enterprise to continue in business, value will be maximized for the benefit of the debtor’s unsecured creditors. Generally a going concern is worth more than a business that is in a state of forced liquidation. Often chapter 11 will be used as a platform to sell an operating business. The proceeds are then used to repay creditors according to priority.

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