Chapter 7 vs. Chapter 11: What’s the Difference?
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Chapter 7 bankruptcy and Chapter 11 bankruptcy are both common options for businesses in declaring bankruptcy. The key differences essentially amount to liquidation vs. a reorganization and restructuring of debt.
A business may liquidate through the bankruptcy process by filing a petition under either Chapter 7 or Chapter 11. But the primary purpose of a Chapter 7 bankruptcy is to liquidate the debtor’s non-exempt assets, make a distribution to creditors, and for the debtor to receive a discharge from prepetition debts, giving the debtor a fresh start. Chapter 7 cases are typically only filed voluntarily by the debtor.
The primary purpose of a Chapter 11 bankruptcy is to give business entities and individuals with large amounts of debt an opportunity to reorganize their financial affairs. The debtor in Chapter 11 ordinarily files a plan of reorganization to be voted on by its various classes of creditors. The plan may provide for restructuring of the debtor’s debts. Alternatively, the debtor can conduct a company sale under 11 U.S.C. § 363 followed by a liquidating plan that distributes the sale proceeds to creditors.
Chapter 7 vs. Chapter 11 bankruptcy: Key differences
| Chapter 7 | Chapter 11 | |
| Must the debtor file a petition and full set of schedules in Bankruptcy Court? | Yes. | Yes. |
| Does filing trigger the automatic stay? | Yes, unless otherwise precluded by prior filing. | Yes, unless otherwise precluded by prior filing. |
| Is a trustee appointed? | Yes. The trustee receives a nominal fee pursuant to 11 U.S.C. § 330 and a commission from sales proceeds consistent with 11 U.S.C. § 326. | No, with exceptions. 11 U.S.C. § 1104 allows for appointment of a trustee in certain circumstances. Also, a trustee is automatically appointed in Subchapter V small business cases. |
| Is the debtor required to attend a § 341 Meeting? | Yes. | Yes. Small business debtors must also attend an initial interview pursuant to 28 USC § 586(a)(7). |
| Does the debtor participate in liquidation? | No. | Yes. Debtor may file motions for § 363 sales and propose a plan of liquidation. |
| Is the debtor allowed to continue business operations post-petition? | No. The trustee may continue business operations under certain limited circumstances 11 U.S.C. § 721. | Yes. |
| What is the average length of a case? | 4-6 months | At least 4 months, but likely longer as debtor negotiates plan terms with creditors. |
| Does the chapter maximize recovery for creditors? | A Chapter 7 trustee will have specialized experience in liquidating a wide variety of assets, but Chapter 7 purchasers expect steep discounts. | Chapter 11 purchasers could pay more for a going concern, resulting in greater recovery. |
| Can the debtor-in-possession or trustee avoid transfers (e.g. preferences, fraudulent transfers, etc.)? | Yes. | Yes. |
| What is the statutory authority to liquidate? | 11 U.S.C. § 704(a) | 11 U.S.C. § 1123(a)(5); 11 U.S.C. § 1123(b)(4) |
| Are § 363 asset sales allowed? | Yes. | Yes. |
| Is liquidating through the chapter cost effective? | Depends. Debtor must pay filing and administrative fees pursuant to 28 U.S.C. § 1930, pre-petition attorneys’ fees, and, potentially, costs of any bankruptcy litigation. | Depends. Debtor must pay filing and administrative fees pursuant to 28 U.S.C. § 1930, ongoing attorneys’ and professionals’ fees as approved by the court, quarterly fees and, potentially, costs of any bankruptcy litigation. |
| Does the debtor receive a discharge of remaining debts? | No. | No. |