The Differences Between Personal and Corporate Bankruptcy

Bankruptcy is a common tool used by both individuals and businesses in order for them to get rid of debt that will likely continue to go unpaid, and to allow for a clean financial slate. However, personal bankruptcy and business bankruptcy are not the same things and have different rules and chapters.

Personal Bankruptcy – Chapters 7 and 13

Chapter 7 bankruptcy is for individuals who have no hope of repaying acquired debt. This chapter is for people who have little income and the end result is a bankruptcy discharge of qualifying debt.

Chapter 13 bankruptcy is for individuals who have income and could manage their debt if they had a payment plan. The purpose of this chapter is to help those who may have an improved financial condition as a result of bankruptcy or are struggling to pay debts but are not completely destitute.

Corporate/Business Bankruptcy – Chapters 7 and 11

Businesses may also file under Chapter 7, but the end result is the dissolution of the entity instead of reorganization.

Chapter 11 bankruptcy is for businesses, including corporations, to either reorganize or liquidate their assets in order to repay debt. Most of the time, a Chapter 11 filing results in a reorganization. Debtors get to propose their own plans at first, but after a certain amount of time has passed, creditors may also propose reorganization plans. The creditors have to vote to approve of whatever plan is selected.

Individuals can file under Chapter 11, but since this chapter is more complicated, most people opt for a Chapter 7 or 13 bankruptcy.

General Differences Between Business and Personal Bankruptcy

One of the big differences between personal and business bankruptcy is the means test. Individuals have to participate in one to determine if they are eligible for a Chapter 7 or a Chapter 13, while businesses do not have to prove this for a Chapter 11 filing.

Businesses can also cancel contracts with creditors if it would be financially favorable to both parties to do so, while individuals do not get that option for student loan debt or other types of debt exempt from bankruptcy.

Getting Legal Help

Regardless of whether you are an individual or a business, it is important to talk with a licensed bankruptcy attorney in your area before deciding to file for bankruptcy. This area of law is extremely complicated and changing laws have made it more complex than it used to be.

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