The Differences Between Personal and Corporate Bankruptcy

Bankruptcy allows individuals and businesses to move forward with a clean financial slate by eliminating debt that would likely remain unpaid. However, personal bankruptcy and business bankruptcy work differently. In this article, you'll learn about the bankruptcy chapters available to individuals and companies and what to expect in each case.

Once you've learned the differences between personal and corporate bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.

Personal Bankruptcy – Chapters 7 and 13

Chapter 7 bankruptcy works well for individuals who can't repay their debt because of little income or substantial expenses. Chapter 13 bankruptcy is for income-earning individuals who can afford to pay some amount to creditors through a three- or five-year payment plan.

Chapter 13 also benefits people facing foreclosure or repossession because the payment plan allows the filer to catch up on past payments over time. Learn about filing for bankruptcy if your house is in foreclosure.

Corporate or Business Bankruptcy – Chapter 7

Businesses can also file under Chapter 7, but filing for Chapter 7 will close all companies except service-oriented sole proprietors. In Chapter 7, the Chapter 7 trustee sells the business property and distributes the money to creditors. Chapter 7 doesn't have a mechanism that would allow a business to restructure debt and continue operating.

Learn about Chapter 7 bankruptcy for businesses and corporations.

Corporate or Business Bankruptcy – Chapter 11

Businesses that want to continue operating can file for Chapter 11 bankruptcy to restructure debt and create an affordable plan. Large companies file the traditional, expensive version of Chapter 11 that allows creditors to vote and approve the plan. Individuals can file for Chapter 11 when their debts exceed Chapter 13's debt limits.

Smaller companies can opt for the more straightforward, less expensive Chapter 11, Subchapter V, which is patterned more closely after Chapter 13. Find out more about Chapter 11 for small businesses.

Key Differences Between Personal and Corporate Chapter 7 Bankruptcies

Most people don't realize that while an individual who files for Chapter 7 will receive a debt discharge, a business will not, except for sole proprietors. Businesses rarely file for Chapter 7 because of the lack of a discharge and cheaper, less legally risky ways of closing a company exist.

Instead, many former company owners file for Chapter 7 personally after a business closure. Not only can the owner accomplish the goal of wiping out personal guarantees for business debt, but if the filer has more business debt than consumer debt, the filer doesn't have to qualify for Chapter 7 by passing the means test. Being exempt from the means test can benefit a prior owner who has moved on to more lucrative employment.

Getting Legal Help

Whether you're an individual or a business, you should talk with a licensed bankruptcy attorney in your area before deciding to file for bankruptcy. Learn about your options if you can't afford a bankruptcy lawyer.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.