Understanding Bankruptcy: Chapters 7 & 11

Bankruptcy is a legal tool providing a fresh start for those with overwhelming debt, but there are many differing filings. The U.S. Bankruptcy Code offers different "chapters," each with a distinct path. The most common bankruptcy chapters are 7  & 11, and understanding their differences is key. Here’s a breakdown of what each one means and who it's for. 

Chapter 7: Liquidation Bankruptcy 

Often called "liquidation" bankruptcy, Chapter 7 is the most common form for both individuals and businesses with limited income. To qualify, they must pass a "means test." A court-appointed trustee sells the debtor’s non-exempt assets and distributes the proceeds to creditors. The goal is to quickly discharge most unsecured debts, offering a financial reset. Certain debts, like student loans, are typically not dischargeable. 

Chapter 11: Reorganization for Businesses 

Chapter 11 is primarily a complex reorganization designed for businesses that want to continue operating while restructuring their finances. The business proposes a detailed plan to pay creditors over time, which must be approved. The goal is to allow the business to become profitable again. Chapter 11 is also available to high-net-worth individuals with debts exceeding Chapter 13 limits. 

At a Glance: Key Differences 

Feature	Chapter 7	Chapter 11
Primary Goal	Liquidation	Reorganization
Mainly For	Individuals & some Businesses	Businesses (and high-net-worth individuals)
Assets	Non-exempt assets are sold	Debtor keeps assets (while reorganizing)
Process	Discharges most debt quickly	Complex reorganization
Duration	3-6 months typically	1-3+ years (sometimes longer)
Cost	Relatively inexpensive	Very expensive
Creditor Repayment	Little to none (after liquidation of non-exempt assets)	Partial repayment over time per approved plan
Business Operations	Business typically ceases operations	Business continues operating ("debtor in possession")
Court Involvement	Minimal after trustee appointed	Extensive; ongoing court supervision

Filing for bankruptcy is a major decision. While this guide explains the basics, it isn't a substitute for professional legal advice. If you're facing financial hardship, consult a qualified bankruptcy attorney to review your situation and determine the best path for you.