Recent economic conditions have resulted in a substantial increase in bankruptcy filings. Whether to file a Chapter 7 vs. 11 is a question that should be discussed with your bankruptcy attorney. Your attorney can advise you which option is the best for your particular financial situation. Choosing to file under Chapter 7 vs. 11 also depends on whether you intend to keep your assets, home, car and business, or you want to completely get rid of your debt, Chapter 7 is most often used by individuals. Chapter 11 is most often used by businesses.
Chapter 7
Chapter 7 is known as a complete liquidation. In a Chapter 7, your assets are placed under control of the bankruptcy Trustee who sells them to pay off your creditors, except for state and federal exempted assets. You must meet the Chapter 7 eligibility requirements based upon your income and other state requirements. If you qualify for Chapter 7, your debts will be wiped out, except for excluded debts such as the following:
- Child support
- Spousal support
- Secured debt (except mortgage debt)
- Income taxes (except Federal taxes that are at least three years old may be discharged)
- Student loans
Chapter 7 allows you the opportunity to start over again without any debt. You may be able to keep your home, car and some personal assets if they qualify under your state exemption laws. You also have the choice of using the federal exemption laws if they are more favorable than your state exemption. Businesses may also take advantage of filing Chapter 7. The business must stop doing business, and the Trustee sells all the company’s assets to pay off company debt.
Chapter 11
Chapter 11 is the preferred method used by businesses because you can stay in business. It’s known as a reorganization. The business gets to keep their assets and to reorganize their debts. The business must earn enough income to enter into a payment plan with their creditors. The plan is usually for a 3-5 year period, and must be approved by the bankruptcy court. Individuals can also seek relief under Chapter 11 if their income is too high to file under Chapter 7, or if they have too many debts which disqualify them for filing under Chapter 13.
Obtain Legal Advice
Bankruptcy is a serious matter. You should seek legal advice if you are thinking of filing for bankruptcy. A bankruptcy attorney can explain the bankruptcy laws and process to you, and represent you in bankruptcy court.
