Chapter 7 chapter 11 bankruptcy

There are various chapters under U.S. bankruptcy code. However, two of the extremes are chapter 7 and chapter 11. Chapter 7 is a method of liquidation whereas chapter 11 is a method of reorganization.

Let's see the functionality of both the chapter one by one.

Chapter 7

An individual or a business firm files for a bankruptcy under chapter 7 when their expenses exceed their income. It is a process of liquidation wherein all the non-exempted assets are liquidated in order to pay back the debt to the creditors. A chapter 7 can filed due to various reasons like economic hardship, unexpected lawsuits, illness, tax debts, unemployment or any reason that has made them insolvent. A debtor files for bankruptcy under chapter 7 so that he can get some relief from some of his debt or could eliminate his unsecured debt and to protect his primary assets. There is a provision of State Law Exemptions apart from The Federal government exemptions. They are given by various states where the bankruptcy is being filed and differ from state to state. This gives a debtor a privilege to protect some of his assets.

Chapter 11

An individual or a business firm/corporation both can file for a bankruptcy under chapter 11. This is mainly known as reorganization bankruptcy because it offers a chance to reorganize one's business or profession and along with that pay back their loan to the creditor under different terms and condition. It is particularly good for business firms and corporations because it allows them to keep their business running and pay their creditors from the future generated revenue. In case an individual files a petition for bankruptcy under chapter 11, he is allowed to continue his profession.

There is one common and important similarity when a bankruptcy case is filed under chapter 11 or chapter 7:

The Automatic stay

Bankruptcy law allows automatic stay in both cases. Wherein, the debtors get a right to protect his assets from the forceful creditor until the case is running in the bankruptcy court. Once the court makes its decision, both creditor and debtor have to proceed in accordance to the decision made by the bankruptcy court. It is one of the most powerful tools in the bankruptcy law as no one wants to get rid of their primary assets and its protection is the first thing in their mind. However, there are few exceptions in automatic stay, but they totally depend on the state laws.