Which is Better Chapter 7 or Chapter 11

by San Antonio Attorney

The decision to file bankruptcy under chapter 7 or chapter 11 is best undertaken following consideration of the advantages and disadvantages related to the circumstances of the debtor. Current income and costs incurred need to be considered.

Chapter 7, while available to both individuals and businesses is more suitable for individuals willing to liquidate their non-exempt assets in return for the removal of cumbersome debts. A non-business debtor with a regular monthly income is required to take a means test to ensure that the case is suitable for Chapter 7 especially if the monthly income is approximately 11,000 or above. Filing fees for chapter seven are relatively in expensive at under $300, and it is possible to have the original costs spread over a period of four months. However, to file chapter 11 involves initial filing fees of over $1000, though these too can be ameliorated over time. Attorneys’ fees are more for chapter 11 than chapter 7 due to the complexity of the issues involved and the extensive time that must be devoted to the case.

In addition, chapter 7 is more suitable for individuals who are prepared to liquidate their assets in order to get out of debt. On filing, a stay gives the debtor relief from the demands of creditors. Also, for  individuals chapter 7 is relatively straightforward and there is little involvement with the bankruptcy court as a court appointed trustee handles the details. Assuming clear declarations are made and full disclosure of the debtor’s assets and debts are provided ensuring no intent to mislead the court, chapter 7 proceeds in a straightforward manner and allows the individual or husband and wife to have their debts discharged and begin their lives a new.

The attraction of chapter 11 for those business, partnerships, or sole proprietors burdened with debt is that it allows for the retention of the business and the reduction or reorganization of debt. For one thing, as the debtor in possession is operating the business during the period of reorganization, provision is made for such things as borrowing capital related to the business under special court authorized conditions. However, due to the costs involved, the complexity of the process and the length of proceedings, debtors do need to consider this option carefully.

As well as full disclosure of all financial and assets information related to the business, the debtor in possession is also required to file a repayment plan; creditors may also file repayment plans under certain circumstances. The debtor in possession has the exclusive right to file a plan for 120 days from the initial filing date.

As chapter 11 positions the debtor as debtor in possession, a trustee is not usually appointed to handle the details and the US trustee assumes a monitoring role only; this approach puts considerable responsibility on the debtor to engage with the bankruptcy court, the creditors’ committee and others who may become involved. It is generally advisable to engage a lawyer, and other officials who become part of the proceedings, such as the US Trustee, are able to demand payment on approximately a quarterly basis. An entity such as a corporation or partnership must be represented by counsel.

Chapter 11 does offer some simpler options for small businesses that encourage the process to proceed more swiftly than for larger operations; however, it is still a complex option and there is the possibility that it can be converter to chapter 7 if due cause is proven. Small businesses or sole proprietors wishing to avoid liquidation may also consider chapter 13 as a simpler and less expensive option to chapter 11.

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