Depending on the type of bankruptcy filed, the outcomes will be very different. Chapter 7 and chapter 11 bankruptcies differ in how assets are handled and the required actions of the filers. Chapter 7 functions as a liquidation bankruptcy and chapter 11 as a form of reorganization; chapter 7 brings operations to a close, while chapter 11 presents an opportunity for debtors to make changes and continue on.
In chapter 7 bankruptcies, virtually all of the debtor’s assets are sold to repay creditors. Personal items, such as clothing or primary residence are typically left in possession of the debtor. Chapter 11 is known as a reorganization bankruptcy because the debtor continues to operate while making changes to the way the business is run or personal finances are handled. The debtor will also work with creditors to change the terms of outstanding debt in order to make payments.
Chapter 7 is the most common type of bankruptcy in the United States. Once chapter 7 is filed, it may not be claimed again for seven years. While chapter 7 offers a clean slate, chapter 11 allows the entity to continue operating in the hope of turning things around. If the reorganization is not successful, chapter 7 might be filed at a later date.
Both forms require a trustee to be appointed. The role of the trustee differs depending on the type of bankruptcy being pursued. In chapter 7, the trustee is responsible for selling the debtor’s assets in an attempt to pay off creditors. In cases of chapter 11, the trustee is required to work with the debtor to create a repayment plan for the creditors.
Creditor repayment is prioritized according to the type of debt that is owed. In chapter 7, secured debt, or loans based on specific assets, are repaid first. The remaining assets are used to pay off creditors with unsecured loans. This would include preferred shareholders, for instance. In chapter 11, with continued operation, it is possible that the debt will be decreased after repayment terms are decided. It is possible that the creditors will receive a smaller amount than what is owed. The remaining debt may be forgiven.
Certain types of debt such as child support or alimony are rarely, if ever, forgiven. Originally intended for large corporations, chapter 11 is now available to individuals.