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The differences between Chapter 7 and Chapter 11 bankruptcy

On Behalf of | Mar 1, 2021 | Chapter 11 Bankruptcy, Chapter 7 Bankruptcy

If a debtor in Escondido, California, feels they can no longer manage debt, they may file bankruptcy. Bankruptcy is a legal process that allows a debtor to remove some debts. Two common types of bankruptcy include Chapter 7 and Chapter 11 bankruptcy, but they differ.

Chapter 7 bankruptcy

Chapter 7 liquidates a debtor’s nonexempt assets to pay creditors using a trustee to value and sell items. Some non-exempt items include vacation homes, watercraft, non-primary vehicles, valuable art collections and jewelry.

However, the debtor has to meet the income requirements to qualify for Chapter 7. The courts determine if the debtor has enough disposable income to pay debts using a Means Test.

Nonexempt debts do not get removed in bankruptcy, which include child support, alimony, debt from malicious acts and current taxes. Secured non-exempt debts, or debts with collateral, commonly get paid first because of the consequences of not paying them. The debtor usually gets a discharge in four months if they satisfy all of the requirements.

Chapter 11 bankruptcy

While individual debtors may file Chapter 11, it is more complex and commonly costs more to file. Since Chapter 13 currently caps unsecured debt at $360,475, many high-earning corporations and businesses file this type of bankruptcy. Similar to Chapter 13, it allows businesses to pay debts through a structured plan approved by the court.

Unlike Chapter 7, the owner does not have to relinquish property and may proceed to operate during the process. A business commonly has four to 18 months to devise a repayment plan, and they must ensure it treats all creditors fairly.

Bankruptcy relieves debtors of some debt, but it can impact credit scores for several years. Bankruptcy also requires filling out forms correctly. For these reasons, consulting an attorney may help increase the chance of a successful case or advise the debtor on other options.