Cropped view of female hands near house model, paper with bankruptcy

Chapter 11 vs. Chapter 7

Hoke Law Firm April 15, 2024

Facing financial hardship can be challenging, but understanding the options available can offer a crucial step toward regaining financial stability. While often viewed with apprehension or failure, bankruptcy is a legitimate financial tool that is designed to provide a fresh start or a structured path to financial recovery.  

Chapter 7 and Chapter 11 bankruptcies, two of the most commonly filed chapters, serve different purposes and are suitable for different financial situations. Distinguishing between these two chapters can help you make informed decisions that can significantly impact your financial recovery process. This can be particularly important for protecting your assets, long-term financial planning, and even the future of your business.  

At Hoke Law Firm, we aim to provide a clear breakdown of Chapter 7 and Chapter 11 bankruptcy and offer experienced guidance to help you understand which debt relief option might work best for you. 

What Is Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," provides a pathway for individuals and some businesses to eliminate most of their unsecured debts (credit card debt, medical bills, personal unsecured loans) by liquidating any non-exempt assets to pay off creditors. This type of bankruptcy is typically recommended for individuals with a limited income and few assets.  

What Is the Chapter 7 Filing Process? 

Eligibility for Chapter 7 is determined by a "means test," which aims to ensure that this option is reserved for those who genuinely cannot pay their debts. For those overwhelmed by debt and without significant income or assets, Chapter 7 bankruptcy can provide a clean slate usually within a matter of months. 

The process for filing for Chapter 7 bankruptcy is relatively streamlined. A bankruptcy trustee is appointed by the court to oversee the liquidation of one's non-exempt assets and to use the proceeds to pay off creditors. For individuals and small business owners, Louisiana law provides exemptions that may allow you to retain some property. These exemptions are generous and are tailored to protect necessities like your home, vehicle, and tools of your trade: 

  • Homestead Exemption: This allows you to protect equity in your primary residence up to $35,000, making sure that you do not lose your home.  

  • Motor Vehicle Exemption: This allows you to exempt up to $7,500 of equity in one motor vehicle used by you and your family. 

  • Personal Property Exemption: This allows you to keep certain items such as clothing and family heirlooms up to $5,000 in value.  

Other exemptions include certain amounts of equity in vehicles, tools that are necessary for work, and some types of retirement accounts, which can help protect your job and maintain financial stability after bankruptcy. 

Advantages of Chapter 7 Bankruptcy 

  • Immediate Automatic Stay: Filing for Chapter 7 bankruptcy invokes an automatic stay, which immediately stops most creditors from pursuing debt collection, foreclosures, evictions, and wage garnishments. This can provide much-needed relief and time to reorganize your finances. 

  • Debt Discharge: One of the most significant advantages is the discharge of unsecured debts such as credit card debt, medical bills, and personal loans. 

  • Quick Process: Compared to other bankruptcy chapters, Chapter 7 proceedings are relatively quick, often concluding within 3 to 6 months. 

  • No Repayment Plan: Chapter 7 does not require filers to enter into a long-term repayment plan. This can be particularly beneficial for those with limited income. 

Disadvantages of Chapter 7 Bankruptcy 

  • Impact on Credit: Chapter 7 bankruptcy can negatively impact your credit score and stay on your credit report for ten years, making it difficult to obtain new credit, loans, or even housing. 

  • Loss of Property: While there are exemptions, if you have significant non-exempt assets, they may be liquidated to pay off creditors. This can mean losing property that exceeds state or federal exemption limits. 

  • Ineligibility for Certain Debts: Not all debts can be discharged under Chapter 7. Obligations like student loans, alimony, child support, and recent tax debt are generally not discharged. 

  • Means Test Requirement: Eligibility for Chapter 7 is restricted to those who pass the means test, potentially disqualifying individuals with higher incomes. 

What Is Chapter 11 Bankruptcy? 

Chapter 11 bankruptcy, commonly referred to as "reorganization bankruptcy," allows businesses experiencing financial distress to continue operating while they restructure their debts. Unlike Chapter 7, which focuses on liquidation, Chapter 11 is more about finding a viable path forward for the debtor by sustainably reorganizing their financial obligations.  

What Is the Chapter 11 Filing Process? 

To file for Chapter 11 in Louisiana, the business of the debtor (called a "debtor in possession") must file a petition in bankruptcy court. Typically, the debtor retains control of their assets and operates the business under the court's oversight. Additionally, the debtor must develop a reorganization plan, which details how the debtor intends to repay creditors over time. This plan is subject to approval by any creditors and must be confirmed by the Louisiana bankruptcy court. 

Debtors are given a period during which they have the exclusive right to file their reorganization plan. The plan categorizes creditors according to their priority and proposes a method of repayment for each classification. It’s a complex negotiation process that often requires experience in both business strategy and bankruptcy law. 

Advantages of Chapter 11 Bankruptcy 

  • Business Continuity: Companies can continue their operations, maintaining customer relations and generating revenue throughout the bankruptcy process. 

  • Flexible Repayment Plans: Chapter 11 provides the flexibility to renegotiate the terms of debt, potentially lowering the amount owed and extending repayment times. 

  • Automatic Stay Protection: Filing for Chapter 11 triggers an automatic stay, immediately halting all collection activities, lawsuits, and foreclosures against the debtor. 

  • Opportunity to Reorganize: It presents an opportunity for businesses to reevaluate their operations, streamline costs, and emerge as a stronger, more financially stable entity. 

Disadvantages of Chapter 11 Bankruptcy 

  • Complexity and Cost: The Chapter 11 process is legally complex and can be fraught with administrative hurdles and substantial legal costs. 

  • Public Disclosure: Businesses must operate transparently, meaning they must disclose all financial details and strategies, which can impact their competitive positioning. 

  • Time-Consuming: The process can take anywhere from several months to a few years, depending on the size of the business and the nature of both the debt and reorganization plan. 

For businesses and individuals facing what may seem like insurmountable financial burdens, Chapter 11 bankruptcy offers a structured path to reestablish stability and work toward future growth. At Hoke Law Firm, we recognize the gravity of this decision and stand ready to provide the empathetic guidance and authoritative advice needed to navigate this complex process successfully. 

Who Qualifies for Chapter 7 or Chapter 11? 

Determining eligibility for Chapter 7 and Chapter 11 bankruptcy hinges on a mix of an individual's financial circumstances, types of debt, income levels, and for businesses, their operational needs.  

Chapter 7 Eligibility 

Chapter 7 bankruptcy primarily targets individuals and businesses seeking to discharge unsecured debt. Individuals filing for Chapter 7 must first pass a means test. This test is designed to evaluate whether your income is sufficiently low enough to file under Chapter 7. This test compares your average monthly income for the six months before filing against the median income for a household of your size in your state. If your income falls below the median, you're likely eligible. If your income exceeds the median, you may still qualify after subtracting specified monthly expenses.  

For businesses, filing for Chapter 7 will result in the liquidation of the business. Thus, it's typically pursued by those planning to close their operations. 

Chapter 11 Eligibility 

Chapter 11 bankruptcy is accessible to both businesses and individuals, although it's most commonly associated with corporations and partnerships. There are no specific income or means test requirements for Chapter 11. Instead, it's about showing that restructuring the debt could lead to a viable, financially healthy future.  

Particularly for businesses, Chapter 11 enables the company to continue operations while managing and repaying creditors. For individuals, Chapter 11 might come into play when their debt levels are too high to qualify for Chapter 13 bankruptcy, often the case for those with significant personal and business-related financial obligations. 

Choosing the Right Chapter for You 

Determining which bankruptcy chapter you qualify for depends on your income level, assets, and the nature of your debt. Chapter 7 is typically reserved for those with limited income who cannot reasonably pay back their debts, while Chapter 11 is suited for businesses with the intent to restructure and remain operational. 

Seek Experienced Legal Counsel 

At Hoke Law Firm, we combine a deep understanding of bankruptcy law with a genuine concern for the people we serve. Whether you're considering Chapter 7 or Chapter 11 bankruptcy, we're here to help you assess your situation and help you work toward financial recovery. Located in Baton Rouge, Louisiana, we proudly serve clients throughout the neighboring areas of New Orleans and Lafayette.