Chapter 7 vs Chapter 11: Breaking Down the Differences

businessman with head down, money on table, chapter 7 vs chapter 11

According to recent research, 58% of U.S. small business owners are currently worried about permanently closing their doors. As of July 31 2020, around 800 small businesses had already filed for Chapter 11 bankruptcy this year. What does Chapter 11 bankruptcy mean, and how what is Chapter 7 vs Chapter 11?

Today, we’re breaking down the key differences between Chapter 7 vs Chapter 11 filings and what they mean for today’s business owners. 

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is also referred to as liquidation. 

When you file this way, your business assets are liquidated as a way to resolve the existing debt against your business. In exchange, your business credit will be permanently impacted. To qualify for this option, your comprehensive business income must fall below a given median set by your state. 

Filing for Chapter 7 bankruptcy often means your business is closing for good. While it might not be an attractive option for leaders at the helm of a large enterprise, it can be a smart option for sole proprietors and small business owners.

Conversely, if no entity purchases your business assets once they go up for sale, there may be the opportunity to buy them back and save your business. 

What is Chapter 11 Bankruptcy?

There are two primary reasons you may choose to file for Chapter 11 bankruptcy. They are:

  • Your business is too big to file for Chapter 7
  • You aren’t ready to close your business doors yet

Under Chapter 11, you’ll work on a new plan to provide remuneration for your outstanding debts. In the meantime, you’re able to ward off the creditors that keep pressing for payment. 

As expected, this type of filing is most often accessed by larger corporations that have a greater chance of proving their worth after bankruptcy. Once you’ve convinced a bankruptcy court that this filing will only be a short-term setback, you can move forward.

Although Chapter 11 is most commonly associated with big enterprises, this isn’t always the case. Small business owners can also leverage this approach to reorganize their business.

To take your case to court, the following conditions must be true for your small business:

  • You have fewer than 500 employees
  • Your business owes less than $2.19 million

If these apply, you can file a petition with the U.S. Bankruptcy Court for bankruptcy protection. Once you’ve filed under Chapter 11, you’ll meet with your creditors to discuss your financial details and propose a reorganization plan. Your creditors have the power to approve or disapprove your plan, and each class of creditors must approve it before you can put it into practice.

Chapter 7 vs Chapter 11 Bankruptcy: We Can Help

If your small business is experiencing financial distress, bankruptcy might be the only viable solution. If this is the case, you’re likely overwhelmed by your many options.

If you’re considering filing for Chapter 7 vs Chapter 11 bankruptcy, it pays to work with a team that understands the important features of each option. 

That’s where we come in. Our legal team is well-versed in business law and we have the experience and qualifications you need to navigate these next steps forward. Get in touch with us today and let’s connect.