Bankruptcy: Chapter 7 vs. Chapter 11 vs. Chapter 13

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Difference between Chapter 7 Bankruptcy, Chapter 11 Bankruptcy and Chapter 13 Bankruptcy

Bankruptcy is a term used for a business, an individual or a company ceasing its operations due to heavy losses and the inability to pay its current obligations anddebts. This is more felt by the world today as we face the challenge of global recession. A lot of companies have begun or are continuing to layoff their employees and many businesses have closed down due to this worldwide business killer. There are three popular types of bankruptcy where a company or an individual may opt to file. These are the Chapter 7, Chapter 11 and the Chapter 13 Bankruptcy of the Title 11 of the United States Code.

Chapter 7 Bankruptcy
Chapter 11 Bankruptcy

Definition

The Chapter 7 Bankruptcy of the Title 11 of the United States Code is one of the most common types of bankruptcy filed in the United States. This mainly focuses on the liquidation of a business or the selling of all the remaining assets and its book values in order to pay off all outstanding obligations. With this type of bankruptcy, a business or an individual automatically ceases its operations and sells all their properties. Chapter 11 Bankruptcy on the other hand allows a business (a corporation, partnership, or sole proprietorship) to be reorganized in case they have no more capacity to pay their obligations and continue operations due to heavy losses. The Chapter 13, Title 11 of the United States Code is a bankruptcy code which allows individuals to undertake financial reorganization with the aid of a federal bankruptcy court.

Obligations

If an individual or a business files for the Chapter 7 Bankruptcy, or is forced to file by his creditors due to sustain heavy losses which results in the inability to continue operations, all debts outstanding after all the assets have been exhausted will be wiped clean from the records of the company or the individual. All the losses in principal and interests are to be incurred by their creditors. With the Chapter 11 Bankruptcy, after the proceeds of the sale of all assets have been exhausted, the company is entitled to reorganize through a new set of creditors. In this event, subsequent earnings of the company should be given in priority to the new creditors. Under the Chapter 13 Bankruptcy Code, an individual is given the opportunity to keep his assets and resume business after reorganization. His creditors on the other hand can only collect what is due them in the bankruptcy court 30 – 45 days after the start of the case. The individual will come up with a 3 to 5-year payment scheme for all his creditors.

Operations

Under Chapter 7, a business ceases operations, while for both Chapters 11 and 13, the business continues.

Summary

  • Chapter 7 involves the liquidation of the business and all its properties to be paid to their creditors.
  • Chapter 11 involves the reorganization of a company with the help of new creditors.
  • Chapter 13 involves the reorganization of an individual with a payment scheme.
  • Chapters 11 and 13 are better for business because the operations are still ongoing.

Which bankruptcy is least understood?
  • Chapter 7 Bankruptcy
  • Chapter 11 Bankruptcy
  • Chapter 13 Bankruptcy
 
 

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