The primary difference between Chapter 7 vs Chapter 11 is whether the bankrupt entity intends to continue operating after it exits bankruptcy. An entity that files for protection under Chapter 11 (aka “reorganization”) is typically an entity that wants to continue to do business. Whereas an entity that files for protection under Chapter 7 (aka “liquidation”) is likely to dissolve once their assets have been distributed.
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Chapter 7 – Liquidation
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Chapter 11 – Reorganization
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Who Can File
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Corporations, partnerships, and sole proprietorships that cannot continue operating or meet financial obligations.
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Corporations, partnerships, and sole proprietorships seeking to restructure debt and continue operating. Includes “small business” and “Subchapter V” cases for qualifying debtors.
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Purpose
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To liquidate business assets and use proceeds to pay creditors according to bankruptcy priority rules.
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To reorganize business debts under a court-approved plan that allows continued operation and repayment over time.
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Process Overview
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A court-appointed trustee oversees liquidation by selling assets and distributing funds to creditors. The business typically ceases operations.
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The existing management remains in control as the Debtor in Possession (DIP) and operates the business while proposing a plan of reorganization subject to court and creditor approval.
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Typical Duration
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Generally 4 to 6 months, depending on the number and complexity of assets.
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Often 1 to 3 years or longer, depending on case complexity and plan negotiations.
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How Debts Are Handled
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Business debts are paid from liquidation proceeds. Remaining unpaid debts are not discharged, as the business usually closes.
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Debts are restructured or reduced through a reorganization plan. Creditors may be repaid in full, partially, or over extended terms.
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Outcome
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The business is dissolved after liquidation, and operations end. Creditors receive payment from available assets.
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The business emerges from bankruptcy with a reorganized financial structure and continues operations under new or adjusted debt terms.
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Chapter 7 Bankruptcy is a liquidation process used by businesses (or individuals) that can no longer meet their financial obligations. In a Chapter 7 business case, a court-appointed trustee sells the company’s nonexempt assets, distributes the proceeds to creditors, and the business typically ceases operations.
Corporations, partnerships, and sole proprietorships may file for Chapter 7 bankruptcy when the business can no longer meet its financial obligations or continue operating.
Most Chapter 7 business cases are resolved within four to six months, though the timeline depends on the number of assets and complexity of liquidation.
Chapter 7 is a liquidation process. A court-appointed trustee sells the company’s nonexempt assets and distributes the proceeds to creditors according to bankruptcy priority rules. Unlike individuals, a business does not receive a discharge, the entity typically ceases operations, and remaining debts go unpaid once assets are liquidated.
Chapter 11 Bankruptcy is a reorganization process for businesses seeking to restructure debts and continue operations. The existing management usually remains in control as a Debtor in Possession (DIP) and proposes a court-approved plan to repay creditors over time, allowing the business to emerge with a reorganized financial structure.
Corporations, partnerships, and sole proprietorships may file under Chapter 11 to reorganize their debts and continue operating. The business remains under the control of its existing management as a Debtor in Possession (DIP) during the process.
The timeline varies by case, but Chapter 11 reorganizations often take one to three years to complete. The debtor typically has an exclusive 120-day period to propose a reorganization plan, which can be extended to 18 months.
Chapter 11 allows a business to restructure debt through a court-approved plan of reorganization. Creditors may be repaid in full, partially, or over extended terms. Once the plan is confirmed and completed, the business emerges from bankruptcy with a reorganized financial structure and can continue operations.
The bankruptcy code is specific, but here is the basic payout priority.
Payout Priority in Chapter 11 Bankruptcy
Understanding the key deadlines in a bankruptcy case is essential to protecting creditor rights and ensuring timely action throughout the process.
The Bar Date is a deadline by which all creditors must file their proof of claims within the bankruptcy court. It is critical that the proof of claim is filed correctly and timely, whether it’s secured or unsecured, to ensure creditors’ rights are preserved and to maximize any possible distribution.
The Reclamation Claim Period is the timeframe in which the creditor is permitted to take back certain goods sold to their insolvent customer. The reclamation notice needs to be sent within 20 days from the petition date and covers materials or services provided to the debtor within 45 days preceding the petition date.
The Preference Period is the 90-day period prior to the bankruptcy filing. If the debtor makes any payments to the creditor within that preference period, the trustee can recall (or “claw back”) those payments.
Beyond the more common Chapters 7 and 11, several other chapters of bankruptcy address specific financial situations for individuals, businesses, and public entities.
Subchapter V Bankruptcy is a streamlined version of Chapter 11 designed specifically for small businesses. It allows business owners to reorganize debts more quickly and with lower administrative costs, while keeping control of the business as a Debtor in Possession (DIP). Subchapter V simplifies plan approval, creditor involvement, and court procedures to help small businesses return to viability faster.
Chapter 9 Bankruptcy is a form of bankruptcy specifically for municipalities (cities, towns, counties), and other public entities. It allows a municipality to reorganize its debts under court supervision while continuing to provide essential public services, rather than liquidating assets like in business bankruptcies.
Chapter 13 Bankruptcy is designed for individuals with regular income who want to restructure their debts without liquidating assets. It allows debtors to propose a repayment plan, typically lasting three to five years, to pay creditors over time while keeping property like homes or vehicles.
Chapter 15 Bankruptcy deals with cross-border insolvency cases involving debtors, assets, or creditors in more than one country. It provides a legal framework for cooperation between U.S. courts and foreign courts to manage international bankruptcy proceedings efficiently and protect creditor and debtor rights globally.
The automatic stay is an injunction that stops any and all collection activity against the bankrupt entity and the automatic stay goes into effect as soon as the bankruptcy petition is filed. The automatic stay impacts all creditors.
A Bankruptcy Proof of Claim is a document filed within the bankruptcy court that alerts the court, debtor, Trustee, and other interested parties that a creditor wishes to register a claim against the assets of the bankruptcy estate. This document is important because it provides proof the claim is valid and owed and it notifies the Trustee of the creditor’s claim as well as to what class the claim should be associated.
A 503(b)(9) Claim is the claim a creditor can make for the materials or services provided to the debtor within 20 days preceding the petition date, if “the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
Of note, some creditors rebuke UCC filings by saying “We don’t need to file a UCC because we file 503(b)(9) claims.” A properly perfected security interest (aka UCC) provides priority in payout, and it protects to the extent of the pledged collateral, unlike a 503(b)(9) claim which only covers goods sold within 20 days of the bankruptcy filing date… extent of the pledged collateral or goods sold within 20 days.
Additionally, some creditors who rely on 503(b)(9) claims for recovery also find it beneficial to try and assert their position as a critical vendor.
When a company files for Chapter 11 bankruptcy, it often needs cash to keep operating during the reorganization process. Debtor in Possession (DIP) Financing is a special type of loan that provides these funds. The business remains under the control of its existing management or ownership, but because of the bankruptcy, it must secure court-approved financing to pay ongoing expenses and maintain operations.