It can be confusing and stressful when you face an overwhelming debt. You could be a business owner in Los Angeles who cannot afford to pay your employees, or a high-income earner who can no longer bear the financial obligation. The United States Bankruptcy Code can provide you with legal instruments for relief. Chapters 7 and 11 bankruptcy are the two most significant choices in California.
The two are under the umbrella of federal bankruptcy law, but they are completely different in their intended application and are applicable in entirely different circumstances. Chapter 11 vs. Chapter 7 is a procedural step and an important strategic choice shaping your financial future.
This article describes these two different types of bankruptcy in detail. You learn their procedures, objectives, and results to help you determine the right choice.
An Overview of Chapter 7 Bankruptcy
The most common type of bankruptcy filed in the United States is Chapter 7, or liquidation bankruptcy. It is simple and effective in its purpose, namely, to give you a clean slate by clearing the qualifying debts. It is all about the systematic selling off of your non-exempt property by a court-appointed officer called a bankruptcy trustee. The funds from the sale of these assets are then given to your creditors. To do so, the bankruptcy court orders a discharge that effectively cancels your debt to repay most of your unsecured debts, including credit card balances, medical bills, and personal loans.
Filing Chapter 7 is a wrong belief because most people think they will lose what they have. This is hardly the reason, particularly in California, which has two sets of generous property exemptions for filers. These exemptions shield some property up to a certain amount, for example, your home, car, working gear, and retirement savings.
A little more than two-thirds of individual Chapter 7 cases are no-asset cases. That means the filer can claim all their property as exempt, and creditors recover nothing in a liquidation since they can sell none of their non-exempt property.
Who is Eligible for Chapter 7?
Not everyone is eligible for Chapter 7, as it is mainly designed to cover debtors who cannot afford to repay their debts. The Chapter 7 "means test" is an individual's primary entry point. This test will compare your monthly average income within the six months before the time of filing with the median income of a household of your size in California. You are automatically eligible when you earn less than the median. With an income exceeding the median, you might still be eligible, should you have a disposable income less than that needed to finance a meaningful repayment plan under a different chapter.
In the case of businesses, it is another path. A corporation, partnership, or LLC may also apply to Chapter 7, but it does so knowing it is winding up and will never reopen. A business has no means test, but the result is unmitigated: the business is wound up, a trustee is appointed to sell all the company assets, and the money is distributed to the creditors.
The discharge is not passed to the business entity, but the business entity is dissolved. Chapter 7 is, therefore, a good choice for business owners whose businesses are no longer profitable and want to have their affairs concluded in a well-organized legal way.
The Chapter 7 Process
When you have already filed your petition in Chapter 7, the court orders an automatic stay, an injunction in effect, and prevents most of the collection efforts against you. This implies that harassing phone calls, wage garnishments, and lawsuits should be stopped, giving you relief and space in the moment.
After filing, the court appoints a bankruptcy trustee, and they manage your case. You shall appear at a so-called 341 meeting of creditors. Creditors are not common at this meeting, although it is called so. It is generally a short hearing, during which the trustee inquires of you under oath to confirm the information in your petition.
If you possess non-exempt assets, the trustee will assume control of them to sell them to the advantage of your creditors. The trustee oversees the whole process, including selling the assets and allocating the money under a priority system provided in the Bankruptcy Code.
Once the trustee has completed the estate administration and all the procedural conditions are fulfilled, the court will discharge you, usually four or six months after you filed your case. This discharge order is the legal document that formally releases you from the individual liability of the debts discharged, and your trip to a financial fresh start is complete.
An Overview of Chapter 11 Bankruptcy
Also called reorganization bankruptcy, the main aim of Chapter 11 is to help a business or a high-asset individual in financial recovery. Rather than selling its assets and going out of business, the debtor suggests a proposal to reorganize its debts, pay its creditors over an extended period, and remain in business.
This renders it a priceless asset to businesses in a liquidity crisis, but with an inherently sound operational model, or to individuals whose financial matters are complex and who cannot be liquidated but must be restructured.
The Chapter 11 hallmark is the idea of the so-called debtor in possession. Most of the time, a trustee is not appointed. Instead, you, the debtor, will be in charge of your property and will still be running the day-to-day activities of your business, or financial life, but now with new fiduciary liabilities to your creditors and under the oversight of the bankruptcy court. This will enable you to use your close ties of familiarity with your own business to shepherd it back to profitability in the safety of the court.
Who Files for Chapter 11?
Almost any business entity, such as a corporation, partnership, LLC, or sole proprietorship, can file Chapter 11. The chapter of choice is one that companies, both small local and large public corporations alike, should consider to be able to go back to profitability, provided they have a chance to restructure their debt structure.
This powerful tool has been more readily accessible than ever recently with the introduction of the Small Business Reorganization Act (SBRA), which, in its more affordable form, Chapter 11 or Subchapter V, was introduced specifically to small businesses.
Chapter 11 is also a critical choice that an individual can make, but it is not prevalent. You could refer to this chapter if you are a high-income earner whose income is so high that it does not qualify you to pass the Chapter 7 means test.
Moreover, it is the sole alternative provided that your secured and unsecured debts surpass the legal restrictions that the Chapter 13 bankruptcy can support. To these people, who may be professionals, real estate investors, or managers of large assets and complex liabilities, Chapter 11 offers an orderly method of addressing debts without sacrificing valuable property that would be lost in a Chapter 7 liquidation.
The Chapter 11 Process
The Chapter 11 process is much more complicated, lengthy, and costly than Chapter 7. Like Chapter 7, it starts with filing a petition, and the automatic stay is imposed. You must carry on much of the work of a trustee as the debtor in possession, including the accounting of property, submitting monthly operating reports to the court, and seeking court permission to make significant business decisions not within the ordinary course, such as the sale of key assets or the entering into of new financing arrangements.
The core of the whole process is the formulation and ratification of a plan of reorganization. During a particular time frame, you are permitted as the debtor to devise a plan specifying how you will settle with your creditors. The plan classifies claims into various categories and defines how each category will be addressed—say, some debts can be paid in full but over a long period, whereas others may be cut. The plan should be complemented with a disclosure statement that gives creditors sufficient information.
Creditors whose rights are involved in the plan are entitled to vote on whether to approve it. To ensure that the court will confirm the plan, it has to satisfy a few legal criteria, such as being proposed in good faith, and it has to be feasible; that is, you must demonstrate that you are likely to be capable of making the proposed payments. It is a marathon, not a sprint, since Chapter 11 can be a long process of negotiating, proposing, and confirming a plan, which can take many months or even years.
Chapter 7 vs. Chapter 11
Comparing the two chapters in terms of several main aspects would be helpful to distinguish the differences. This direct analogy can make you imagine where your scenario may fall under the California bankruptcy.
In terms of the primary purpose, Chapter 7 is aimed at liquidation, for instance, selling assets to clear the debt and grant a rapid resolution of a financial crisis. By contrast, Chapter 11 is aimed at reorganization, which is the restructuring of debts to enable a business to survive or an individual to hold on to important assets.
Regarding the impact on a business, a Chapter 7 filing will always imply that the company will be terminated and become insolvent. Chapter 11, on the other hand, enables the business to be under court protection as it strives to restore itself to financial stability.
The usual filer of each chapter is also different. Chapter 7 is the most appropriate for low-income people who pass the means test and business entities that are no longer viable and require closure. Chapter 11 encompasses running a business of any size and individuals who earn high income or have high assets and cannot be qualified by other chapters.
The difference in the control of assets is significant. In Chapter 7, all your non-exempt property is placed under the legal control of a court-appointed trustee to liquidate it. As the debtor in possession, you are typically in control of your assets and operations in a Chapter 11 case.
The schedule of every process is indicative of how complex it is. A Chapter 7 case is comparatively quick and usually takes four to six months to be closed. A Chapter 11 reorganization is a far more protracted process, often lasting several months to several years to achieve confirmation and completion.
Lastly, the price and the complexity are divergent. Chapter 7 is a less complicated and thus cheaper process. Chapter 11 is much more complicated and costly regarding the large legal effort, administrative costs, and the continued reporting requirements.
The Core Difference Between Liquidation and Reorganization
Understanding the main difference between these two chapters is important before getting to the finer details. Central to this, the contrast is between finality and continuity. Liquidation is Chapter 7 bankruptcy. Consider it the end of business, or a clean sheet of paper to a person. It is primarily conducted to sell non-exempt assets to pay creditors what they can, after which the bulk of remaining unsecured debts are wiped out or discharged. To a business, this would imply extinction. To a person, it is a quick and full reboot.
Chapter 11 bankruptcy is a reorganization in contrast. It is structured not to kill an entity, but to provide one with a second opportunity. A company that is essentially viable but suffocated in debt may use Chapter 11 to reorganize its finances, renegotiate with creditors, and proceed with its business to restore profitability.
Similarly, those with assets who do not qualify under other bankruptcy laws can use Chapter 11 to restructure their complicated financial life without necessarily liquidating all their hard-earned assets. This fundamental distinction between them, the termination of the operations, and their restructuring is the principle on which it is possible to base all other distinctions between them.
How to Choose the Right Path for Your Situation
There is a fine line to walk when navigating your California bankruptcy options, and it depends on evaluating your individual financial situation and your long-term objectives. It is a matter of deciding on a legal process between Chapter 7 and Chapter 11, and the strategy that will give you the best results. Nevertheless, knowing each chapter's optimal situations can be crucial regardless of whether you want a fast and decisive solution or a systematic way to recover.
When to Consider Chapter 7 Bankruptcy
Chapter 7 bankruptcy may be the best option if your scenario indicates the need to give your finances a clean slate. If you have a heavy burden of unsecured debt, including accumulating credit card bills and medical expenses, and have a low income to meet the means test, Chapter 7 may offer the most direct path to salvation.
It is aimed at people lacking the disposable income to pay their creditors. Moreover, should you be a business owner and realize that your business is no longer profitable or viable, Chapter 7 offers an organized and systematic approach to closing down your business cleanly. As a result, your business property can be equally shared between creditors under the guidance of a trustee.
When to Consider Chapter 11 Bankruptcy
On the other hand, Chapter 11 is not your plan when you want to preserve and rebuild, but rather to liquidate. If you are a corporate owner and feel your business is essentially viable but is being choked by its debt, Chapter 11 provides the much-needed breathing room to reorganize.
It enables you to keep operations running, maintain staff, and plan a lucrative future. Similarly, when you are a high-income earner with a lot of assets you are looking to preserve or when your debts are so large as not to be covered by other chapters, Chapter 11 offers an advanced structure to restructure your finances, lessen your liabilities, and save your fortune in the long term.
Hire an Expert Los Angeles Bankruptcy Lawyer Near Me
Bankruptcy rules are complex, the procedural rules are strict, and the financial stakes are high. One mistake or a misconception about your legal rights can cause your case to be thrown out, or you can even lose valuable property. This is especially so where the choice of a bankruptcy chapter is concerned because a wrong filing can be disastrous and irreversible.
An experienced bankruptcy lawyer could be your advocate when choosing the ideal bankruptcy. Your lawyer will carefully analyze your financial situation, like income, debts, and assets, and advise you on the most beneficial chapter that best suits your case. They can maximize your exemptions in a Chapter 7 filing or, in a Chapter 11 case, increase their involvement in debtor-in-possession tasks, creditors' negotiation, and creating a reorganization plan.
It is hard to make a living with an unpredictable financial future, but you do not need to do it alone. When thinking about filing bankruptcy with your business or a personal one, call the skilled lawyers of the Los Angeles Bankruptcy Attorney at 424-285-5525, and we will discuss your options today.
