Chapter 7 vs. Chapter 11 Bankruptcy: What’s the Difference?

February 25, 2022

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.

[Bloomberg Law’s essential news, expert analysis, and practice tools will help you stay on top of the latest developments in bankruptcy, including high-profile filings, court decisions, legal changes, and more. Request demo.]

Download: Chapter 11 Petitions and Litigation – Midyear 2022

This complimentary report will help corporate restructuring and bankruptcy professionals examine the Chapter 11 trends that emerged in the first half of 2022 and strategize for the rest of the year.

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.