If you’re facing serious debt, deciding to declare bankruptcy can feel overwhelming. Which type should you file? What will you lose?
The two most common types for businesses and some high-debt cases are Chapter 7 and Chapter 11. Each comes with benefits and trade-offs. The right choice depends on multiple factors – and the best way to explore your options is to work with an experienced Alabama bankruptcy attorney.
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy is also called “liquidation.” This type of bankruptcy wipes out unsecured debts like credit card balances or medical bills. If you file for Chapter 7, a court-appointed trustee sells certain assets to repay creditors. The trustee gathers the property, manages claims, and distributes the proceeds to each creditor.
Chapter 7 is available for individuals and businesses. If you’re a small business owner and file for Chapter 7, your business cannot continue operations once the petition is filed. In other words, if you just want a clean slate and are ready to shut your company down, Chapter 7 can be a direct way to move forward.
Chapter 7 also provides relief to consumers when their income isn’t enough to cover debts and repayment isn’t realistic. The court applies a “means test,” which considers your ability to pay after considering income and expenses. If your income falls below the Alabama median or you don’t have disposable income left after reasonable expenses, Chapter 7 may be available to you.
Chapter 7 bankruptcy cases can be very fast. Most cases resolve within four to six months. However, Chapter 7 doesn’t allow you to catch up on overdue mortgage payments or keep certain secured assets. The only way you can keep certain property is if you reaffirm those debts and stay on top of the bills.
How Chapter 11 Bankruptcy Works
Chapter 11 bankruptcy is also known as “reorganization.” It allows businesses and some consumers to restructure debts. This allows businesses to get out from under overwhelming debt while continuing to operate. It’s popular with companies that want to stay open but need time and court protection to reorganize their finances.
If you file for Chapter 11, you will create a repayment plan, subject to court approval. The payment plan describes how your debts will be paid over time. Generally, you can renegotiate contracts, reduce debt balances, and downsize operations – all while keeping control of your business as a “debtor in possession.” However, your creditors have the opportunity to vote on the plan, and the court must approve it.
Although this type of bankruptcy is more popular with corporations, Chapter 11 is also available to consumers with very high debts that exceed Chapter 13 limits. Therefore, if you owe more than the Chapter 13 limits but still want to keep your assets and pay creditors over time, Chapter 11 could be a good option.
The downside is that the process is more complex and expensive than Chapter 7. Cases can last several years, and you’ll have ongoing reporting requirements. However, many business owners find the trade-off worth it.
Key Factors to Consider Before Filing
Deciding between Chapter 7 and Chapter 11 depends on your goals and what you’re willing to sacrifice. Here are some points to think through:
- Keep Your Business Open – If your priority is keeping a business running, Chapter 11 helps you restructure. Chapter 7 usually results in closure.
- Asset Protection – Chapter 11 allows you to hold on to valuable assets while repaying creditors. Chapter 7 often involves liquidating them.
- Debt Type and Amount – Large, complex debt is usually better managed through Chapter 11. Chapter 7 is better for unsecured consumer debts when repayment isn’t feasible.
- Timeline – Chapter 7 is faster, while Chapter 11 requires a long-term commitment.
- Cost – Chapter 11 is generally more expensive. This is due to legal and administrative requirements.
Get Support from an Experienced Bankruptcy Attorney Today
Facing debt is stressful, but we can help. Gina H. McDonald & Associates, LLC, is here to walk you through your options and help you choose the best path forward. Contact us today to get started.
