Closing your small business: Chapter 7 vs. Chapter 11 Bankruptcy – which should you file?
You may have secured funding for your business and went through these 7 things to protect it, and saw it to be a success for time. But now, If you’re facing financial difficulties and considering bankruptcy, understanding the key differences between Chapter 7 and Chapter 11 under the US Bankruptcy Code is crucial. Your choice of bankruptcy chapter will depend on various factors, such as your financial goals and objectives. In this article, we’ll provide an in-depth overview of the differences between Chapter 7 and Chapter 11 bankruptcy, as well as the requirements for filing under each chapter.
Debt validation letter
One step that may be helpful to pursue before filing bankruptcy, would be to validate that the debt is even yours. Whether you are an individual or a startup, validating the debt is important. If you don’t recognize it and you are potentially being harassed to pay off the debt, a debt validation letter may be a helpful first step.
Chapter 7 vs Chapter 11 bankruptcy: Understanding key differences
When it comes to bankruptcy, understanding the differences between Chapter 7 and Chapter 11 bankruptcy filings is essential. The most significant distinction is that Chapter 7 is a liquidation bankruptcy, while Chapter 11 is a reorganization bankruptcy. In this article, we’ll delve into the differences between these two types of bankruptcy filings and what they entail.
Chapter 7 bankruptcy: An overview
Individuals have the option to file for bankruptcy under either Chapter 7 or Chapter 11 of the Bankruptcy Code. To qualify for Chapter 7, the individual must meet specific income requirements laid out in the code. Chapter 7 bankruptcy cases are designed for individuals who do not have enough disposable income to repay their debts. Disposable income refers to the amount of money left after paying reasonable living expenses.
Chapter 7 means test calculator
If you are wondering whether you qualify for a chapter 7, use a chapter 7 means test calculator that can help you look into if you qualify, the pros and cons, and other options if it seems as though you don’t qualify.
Do you lose your belongings in Chapter 7 bankruptcy?
When an individual files for Chapter 7 bankruptcy, the trustee may seize and sell any non-exempt property to pay off creditors. Non-exempt property refers to assets with equity that exceeds the allowed bankruptcy exemptions. The amount of each bankruptcy exemption depends on whether the debtor can use federal or state bankruptcy exemptions. The debtor’s residency for the two years preceding the filing of the Chapter 7 petition determines the bankruptcy exemptions they may claim.
Most Chapter 7 cases filed by individuals are no-asset cases. In a no-asset case, the trustee abandons any of the debtor’s property that cannot be sold to repay creditors. The Chapter 7 case is typically complete in about four to six months after filing, and the debtor receives a bankruptcy discharge for most unsecured debts. However, certain debts, such as student loans, most tax debts, debts owed to the government, alimony, and student loans, are not forgivable in bankruptcy.
It’s also important to note that an individual filing for Chapter 7 could lose property that secures a loan, such as a mortgage or a car title loan. If the debtor cannot afford to pay the mortgage or car loan payments, the creditor may recover the collateral to satisfy the debt.
Understanding bankruptcy for individuals and businesses
Chapter 11 and Chapter 7 bankruptcies are vastly different, and understanding their differences is crucial for anyone considering filing for bankruptcy. Chapter 7 bankruptcy is a liquidation bankruptcy, while Chapter 11 is a reorganization bankruptcy that primarily caters to businesses. In this article, we’ll explore the key differences between Chapter 11 and Chapter 7 bankruptcies and the requirements for filing under each chapter.
Chapter 11 bankruptcy for businesses
Chapter 11 bankruptcy is an ideal option for businesses that want to restructure their operations and continue operating while repaying their debts over time. One notable difference between Chapter 11 and Chapter 7 bankruptcies is that Chapter 11 bankruptcies are significantly more expensive. The average cost of a Chapter 11 bankruptcy case for a small business is around $50,000, while larger corporations may spend up to $500,000.
Chapter 11 bankruptcy for individuals
Although Chapter 13 is the most common option for individuals seeking debt restructuring, some may have debts that exceed the Chapter 13 debt limits. In such cases, Chapter 11 bankruptcy may be the only way to restructure their debts. However, it’s worth noting that the Chapter 11 process is typically expensive and inefficient for most individuals. Individuals who have substantial income and assets typically file Chapter 11 cases.
Chapter 7 bankruptcy for businesses
When a business files for Chapter 7 bankruptcy, it means the business is closing down. The Chapter 7 trustee assumes control of all business assets on the date of the bankruptcy filing. Secured creditors receive their collateral, and the remaining assets are sold to pay off the company’s unsecured creditors.
Chapter 11 bankruptcy for businesses
Businesses that want to remain open but need assistance in restructuring their debts can file for Chapter 11 bankruptcy. The party filing for Chapter 11 remains in control of the business assets, and the business continues to operate during the bankruptcy case. However, all Chapter 11 debtors must follow specific guidelines.
Understanding subchapter 5 of Chapter 11 bankruptcy
Subchapter 5 provides a more streamlined approach to Chapter 11 bankruptcy, making it easier for businesses with less debt to receive some benefits from Chapter 11. It can be a smoother process that leads to a Chapter 11 plan confirmation. If you’re interested in exploring Subchapter 5, you can check out an example subchapter to get a better understanding of the process.
Navigating the Chapter 11 bankruptcy process
Chapter 11 bankruptcy is a complex process that involves reorganizing a business and managing debt repayments. It requires the debtor to file a detailed Disclosure Statement, which provides information about the business, including assets, income, liabilities, and other business affairs. In this article, we will provide a comprehensive guide to understanding the Chapter 11 bankruptcy process.
The disclosure statement
The debtor must file a detailed Disclosure Statement that provides enough information for parties to vote for or against the Chapter 11 plan. Some bankruptcy courts have local forms that Chapter 11 debtors can use to prepare the Disclosure Statement.
The Chapter 11 plan of reorganization
The debtor must also file a detailed Chapter 11 Plan of Reorganization, which is much more detailed than the Disclosure Statement. The plan contains descriptions of the classes of claims and how creditors within each class will be paid. Creditors vote for or against the Chapter 11 plan, and the plan cannot be confirmed without creditor participation.
Creditor committees
In some cases, the court may appoint Creditors’ Committees that are responsible for investigating the debtor’s conduct, participating in the administration of the case, and drafting a Chapter 11 plan. Creditors may also file competing plans for consideration.
Confirmation of the Chapter 11 plan
Chapter 11 cases typically involve the filing of numerous motions, including motions to use cash collateral, value assets, assume or reject leases, and continue or cancel contracts. Creditors may file motions to dismiss, convert the case to Chapter 7, or modify the automatic stay to obtain collateral.
The debtor may remain in Chapter 11 for years, and business Chapter 11 cases can be very complex. It could take more than a year to confirm a Chapter 11 plan, during which the debtor must pay quarterly fees and file monthly reports.
Discharge from debt
Upon confirmation of the Chapter 11 plan, the debtor is discharged from any debt incurred before the date of confirmation. The Chapter 11 plan creates a new contract with the debtor’s creditors. If the debtor fails to make the payments required by the Chapter 11 plan, creditors can take certain actions to collect the debts or protect their rights in collateral securing loans.
Streamlined Chapter 11 cases
Small businesses and businesses that own a single asset may file a streamlined Chapter 11 case that is less complex than a regular Chapter 11 case. The process is intended to make it easier for businesses with less debt to receive some benefits from Chapter 11. It can be a smoother process that leads to a Chapter 11 plan confirmation.
Let’s next cover what to expect from a bankruptcy attorney.
Comparing bankruptcy fees and costs: Chapter 7 vs. Chapter 11
While there’s no specific amount of debt you have to be in to file bankruptcy, it can be helpful when understanding the costs. When considering filing for bankruptcy, it’s crucial to understand the associated fees and costs to make an informed decision. This article will compare the filing fees and attorney costs for Chapter 7 and Chapter 11 bankruptcy to help you determine which option is best for your financial situation.
Filing fees
The filing fee for a Chapter 7 bankruptcy case is $335, significantly lower than the $1,717 filing fee for a Chapter 11 case. In addition, debtors filing under Chapter 11 must pay quarterly fees to the United States Trustee. The Chapter 11 quarterly fee is calculated based on the disbursements during the three-month calendar quarter, with a minimum of $325 due each quarter.
Attorney fees
Bankruptcy attorney fees can vary depending on the complexity of the case, the attorney’s experience, and the region where the case is filed. The average attorney fee for a Chapter 7 case ranges from $1,000 to $1,750. On the other hand, Chapter 11 attorney fees can range from $10,000 to $25,000 for small cases and up to $50,000 for medium-sized cases. For large and complex Chapter 11 cases involving multi-million dollar corporations or individuals, attorney fees could cost up to $500,000.
Other considerations
While some individuals and companies can file for Chapter 7 without an attorney, Chapter 11 cases require the assistance of an experienced Chapter 11 lawyer. It’s a complex process that can confuse attorneys who do not have experience handling these types of bankruptcy cases, let alone individuals who have no legal experience or knowledge of the bankruptcy system.
When deciding which type of bankruptcy to file, it’s essential to consider all factors, not just the fees and costs. Although Chapter 7 may be a more straightforward process for some, individuals and businesses with more complicated financial situations may need to consider Chapter 11 bankruptcy, despite the higher fees and costs. Seeking the advice of a qualified bankruptcy attorney can help ensure that you understand the process and make informed decisions.
In conclusion, while the fees and costs associated with Chapter 11 may be higher, the benefits of reorganization and debt restructuring may make it a more viable option for those with complex financial situations.
