(Image by Paul Sableman via CC BY 2.0 )
Do you know the difference between chapter 7 vs chapter 11 bankruptcy? Most people don’t concern themselves with such nuances.
Until a personal finance crisis occurs anyway.
Well, it’s an important distinction to know. It could mean the difference between legally working out your debt problems and losing everything you own.
The current state of personal finance is very bleak for many Americans. Over 40% of Americans couldn’t pay a $400 to cover a financial emergency that presented itself.
That’s because many Americans don’t have $400 saved in the bank on a regular basis, if at all.
Although personal bankruptcy filings have declined precipitously within the last year and decade, over 750,500 Americans filed for bankruptcy in 2019.
The main difference between chapter 7 vs chapter 11 bankruptcy is that one is a personal filing and the other a business filing respectively.
I wish I understood these distinctions when I lost everything of value a decade ago.
I Wish I Knew to Ask about Chapter 7 vs Chapter 11 Before
A decade ago, I got divorced, lost my apartment, lost my job and was penniless. And I mean penniless as in literally penniless.
I had to move back home with my mother as she began falling into ill-health. It may sound like the worst bad luck country song ever, but that was my life 10 years ago.
To say that I was financially illiterate would be an understatement. I never took it upon myself to responsibly assess my finances and figure out how to improve them.
Could declaring chapter 7 bankruptcy have helped me? I don’t know.
But I should have made an effort to find out. Now, let’s look at the differences between chapter 7 vs chapter 11 bankruptcy.
Distinctions Between Chapter 7 vs Chapter 11 Bankruptcy
Let’s start with the basics. Bankruptcy occurs when all of your outstanding debts overwhelmingly outweigh your ability to pay them.
Your ability to conduct personal finances comes to a standstill when you become bankrupt. Debts only increase in these situations. There are many reasons why people become bankrupt, including:
- Divorce
- Job loss
- Legal bills
- Unwieldy debt
- Providing financial support to others
- Student loan debt
- Living beyond one’s means
Almost 67% of personal bankruptcy filings are a direct result of people unable to cope with mounting medical expenses.
OK. So now we have a baseline definition of bankruptcy, what are the distinctions between chapter 7 bankruptcy vs chapter 11?
Chapter 7 bankruptcy is also known as a “fresh start,” or liquidation bankruptcy. This is a legal filing where a trustee oversees your finances and begins a laser-focus on paying off debts.
Chapter 7 bankruptcy filings are usually declared by individuals and not companies.
A chapter 7 bankruptcy trustee assess any assets that can be liquidated to pay off debts that can’t be easily discharged.
To qualify for chapter 7 bankruptcy, you must have a lot of unmanageable debt and an average income which makes settling debts impossible.
This filing allows people to continue owning their homes and work towards resetting their finances in the future.
Chapter 11 bankruptcy is also known as, “rehabilitation bankruptcy.” This is a legal filing that businesses usually declare.
In chapter 11 bankruptcy, a business with unmanageable debt works out new loan payments restructuring terms with its creditors. Such terms must be approved in court.
Chapter 11 bankruptcy allows a business to operate and renegotiate loan repayment terms without having to sell itself or any of its business assets.
Declaring Bankruptcy is Not Cheap
Unless you are a trained legal professional, filing for bankruptcy requires hiring a lawyer. It can cost as much as $2,000 just to begin filing and processing. Costs just add up thereafter.
It takes 10 years for a chapter 7 bankruptcy filing to be deleted from your credit history. Chapter 11 bankruptcy filings becomes part of the public record for businesses.
If you must file for bankruptcy, consult a professional. The process is a lot more complicated that I have described.
Don’t decide on bankruptcy on a whim. It’s is a decision that will affect you for years to come.
Read More
WHAT YOU NEED TO KNOW ABOUT BANKRUPTCY
SIGNS THAT BANKRUPTCY MAY BE THE BEST OPTION
REESTABLISHING YOUR CREDIT AFTER DECLARING BANKRUPTCY
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.