Guides

Chapter 11 vs Chapter 7

The two main US bankruptcy routes for companies. Chapter 11 is a reorganisation in which the business usually keeps operating, and Chapter 7 is a liquidation run by a trustee.

• Chapter 11 is a reorganisation process, usually used by a corporation or partnership, in which the debtor generally proposes a plan to keep its business running and pay creditors over time.¹
• In Chapter 11 the debtor normally stays in control of its business as debtor in possession. A separate case trustee is rarely appointed.¹
• Creditors whose rights are changed by the plan vote on it by class. A class accepts when holders of at least two-thirds in amount and more than half in number of allowed claims agree.¹
• The court confirms a plan only if it is feasible, proposed in good faith and compliant with the Bankruptcy Code. A Chapter 11 case can be converted to Chapter 7 or dismissed for cause.¹
• Chapter 7 is a liquidation. An impartial trustee sells the debtor's non-exempt property and distributes the proceeds to creditors in a set order, with each class paid in full before the next receives anything.²
• Companies do not receive a discharge in Chapter 7. A discharge is available only to individual debtors.²
• Some Chapter 11 cases end with a sale of the business rather than a reorganisation, as when General Motors sold substantially all its assets to a new company in July 2009 and the remaining estate was wound down.³

Sources

1. Administrative Office of the US Courts, Chapter 11: Bankruptcy Basics
2. Administrative Office of the US Courts, Chapter 7: Bankruptcy Basics
3. US Securities and Exchange Commission (EDGAR), Motors Liquidation Company Form 8-K (completion of sale to General Motors Company) (14 July 2009)