Bankruptcy Explained: What's the Difference Between a Chapter 7 and a Chapter 11? By Debbie Dragon At Isnare.com Ezine Articles

Before doing any research, you may believe that bankruptcy is simply the process people go through to get out of paying their financial obligations. Bankruptcy is actually very complicated, and neither option (Chapter 7 or Chapter 11) will allow an individual to get out of paying all of your debt!

Chapter 7 bankruptcies are often referred to as the “liquidation” bankruptcy. Chapter 7 bankruptcies can be filed by individuals, partnerships, corporations or any other business entity.

If an individual or company is filing Chapter 7, it's because they are beyond the ability of reorganizing their debts and are forced to sell many of their assets in order to pay creditors. A trustee is appointed to the filer, and is responsible for ensuring that any assets that are secured and can be sold are sold – and that the proceeds from the sale are given to the specific creditor that secured the purchase in the first place.

If the sale of secured assets result in more money than what is owed to the secured creditors, the assets and cash are pooled together and paid to the outstanding creditors who had provided unsecured loans to the individual or business.

One of the main reasons why people and organizations file a Chapter 7 bankruptcy is to discharge eligible debts and give themselves a fresh start. A debtor who successfully files Chapter 7 will have no liability for the discharged debts – but there are many types of debts that cannot be discharged, including loans used for college, child support and/or alimony, or a lien on a property. A discharge of debt under a Chapter 7 is only possible for individual debtors – not partnerships or other types of corporations.

Once the proper paperwork is filed with the court to begin the Chapter 7, creditors must stop contacting the debtor attempting to collect the debt.

An individual may be denied debt discharges under a Chapter 7 case if the court finds the individual did not keep (or produce) adequate financial records, committed a crime of perjury, was unable to explain loss of assets, concealed, destroyed or illegally transferred property to try and move it out from the estate, or failed to complete a financial management course as required of all debtors filing bankrtupcy.

A Chapter 11 bankruptcy is referred to as the “rehabilitation” bankruptcy. The individual or business can file for Chapter 11 – or the creditors may involuntarily file for the debtor in certain situations. Most Chapter 11 bankruptcies are filed by corporations or other businesses rather than individuals.

In this type of bankruptcy, the debts are reorganized to allow the individual or business a better chance of repaying them and keeping their head above water. The creditors are contacted to get different terms on any loans – interest rates may be lowered, the amount of time you have to repay a debt may be extended to make the monthly payments lower and hopefully, easier to manage. A trustee is appointed to supervise the assets but nothing is sold at this time.

In a Chapter 11 bankrtupcy, you aren't getting rid of your debts – you are simply restructuring and changing the terms of the debt and making plans to pay it back continuously through future earnings.

If a business is filing Chapter 11, it's expected to continue operating successfully. If that proves not to be possible, the business can then file for Chapter 7 and liquidate assets.

In both a Chapter 7 and Chapter 11 filing by a corporation, it's likely that the common shareholders would receive little or no return on their investments.

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