The Difference Between Chapter 11 and Chapter 7 Bankruptcy

When a company cannot repay its debts in challenging financial circumstances, the business may be forced to declare bankruptcy. However, different types of bankruptcies exist depending on the business type and specific situation. Working with an experienced Dallas law firm that specializes in helping companies succeed, like Ritter Spencer Cheng PLLC, can make it easier to determine which type of bankruptcy a company should file to eliminate existing debt and yield a clearer opportunity for future success. Below we explain the differences between Chapter 11 and Chapter 7 bankruptcy for businesses. 

Chapter 11 Reorganization Bankruptcy

Chapter 11 bankruptcy is designed to allow businesses to continue to operate while repaying necessary debts and restructuring the company for long-term success. Specifically, Chapter 11 reorganization bankruptcy is most commonly implemented when big businesses require time to restructure and repay their debts. Either a commercial bankruptcy attorney or the business itself may voluntarily file a bankruptcy petition, or creditors may file an involuntary petition with the bankruptcy court. 

Once a petition is filed, the debtor must submit all relevant financial documents to the court. Additionally, most debtors include a reorganization plan that specifies how the business will pay each claim back. This reorganization strategy is then voted on for approval by the creditors. If approved, the debtor becomes the “debtor in possession,” which allows the company to keep business assets and continue operating while the plan goes into effect. Throughout this process, the creditors oversee the reorganization plan and ensure the debtor adheres to the agreed-upon regulations outlined in the restructuring strategy. 

Chapter 11 for Small Businesses 

To address bankruptcy issues specific to small businesses, the Small Business Reorganization Act of 2019 was passed, and it became effective in February of 2020. This legislation finds a balance between Chapter 11 and Chapter 7 bankruptcy by adding Subchapter V to make reorganization more affordable for small businesses. Like Chapter 11 reorganization bankruptcy, Chapter 11 for small businesses allows a company to remain in control of business assets while implementing a restructuring plan.  

However, to be eligible to file under Chapter 11 for small businesses, a company must have less than $2,725,625 in secured and unsecured debts (which was increased to $7,500,000 until March 27, 2021, due to the pandemic-driven CARES Act) and must not have an appointed active creditor’s committee. When a small business qualifies for this type of bankruptcy, a U.S. trustee still monitors the reorganization process. Additionally, the debtor must continue to submit all relevant forms of financial documents, including profits, payments, receipts, and tax returns. With a strategic plan in place and proper advisement from professionals, like the Dallas commercial bankruptcy attorneys at Ritter Spencer Cheng PLLC, a small business may emerge from bankruptcy with a lucrative strategy for the future. 

Chapter 7 Liquidation

Chapter 7 bankruptcy is specifically designed to allow a business to sell its assets and use the earnings to repay its debts. Any individual, business, or corporation is qualified to file under Chapter 7 bankruptcy. The process begins with the debtor filing a petition with the bankruptcy court, as well as any relevant documents or information regarding business assets, liabilities, financial affairs, income, expenditures, contracts, and tax returns and transcripts. While there is no plan of repayments in a Chapter 7 bankruptcy, collection actions are stopped after a petition is filed, and the appointed U.S. trustee oversees the liquidation of the company’s non-exempt assets. 

Additionally, because the Chapter 7 bankruptcy process is affected by an individual’s monthly income, many may wonder if government stimulus checks impact bankruptcy payments. Future stimulus payments like those from The CARES Act are likely exempt from monthly income calculations so individuals can receive these payments without affecting recurring monthly income.

Ritter Spencer Cheng PLLC has a team of commercial bankruptcy attorneys in Dallas, Texas, who can help determine which type of bankruptcy is best for a specific business. We develop effective and actionable strategies to help companies eliminate their debts. Let’s work together. Learn more about our practice areas and contact our team of commercial bankruptcy attorneys at Ritter Spencer Cheng PLLC today.