Bankruptcy: The differences between Chapter 7 & Chapter 11

If you’re falling behind on credit card and loan payments or noticing that the debt keeps growing despite your best efforts to stay current, it may be time to seek protection against your creditors. Facing bankruptcy can be daunting, but know that millions of Americans have taken this route to get a fresh start with their finances. Here are the differences between Chapter 7 and Chapter 11.

You may qualify for what is the quite easy process of Chapter 7, or, if your financial circumstances are complicated and your debt is very large, you may need to file Chapter 11. Understanding the differences between the two and their impact on your short- and long-term finances will help you navigate the process successfully.

Although many people fear the stigma of bankruptcy, there can also be a sense of relief in taking this step toward resolving your debt. Robert Haupt, a bankruptcy attorney with Lathrop Gage LLP, explains, “As soon as you file bankruptcy you are protected [by the courts]. So there’s an emotional benefit to bankruptcy that you don’t necessarily get from the other debt relief.”  

What is Chapter 7 bankruptcy?

Chapter 7 is the ideal bankruptcy option because it provides the fastest and lowest-cost debt relief. Under Chapter 7, you can eliminate all your unsecured and some secured debt in about 90 days. You may be forced to liquidate some assets — to what extent depends on the state where you live. And you must qualify, which depends on factors including your income and the number of people in your household. The national average cost of filing Chapter 7 is $1,800.

The biggest negative is the blow to your credit. Chapter 7 stays on your report for 10 years. However, you can start rebuilding your credit as soon as you discharge all your debts, and you’ll start getting credit card offers fairly quickly. It may take a couple of years to receive favorable terms for a credit card or car loan and a few years before you can apply for a home or student loan.  

Related article: 6 steps to rebuild your credit after bankruptcy

What is Chapter 11 bankruptcy?

If your debt is quite large and your bankruptcy case is complicated, you may go the Chapter 11 route. Generally used by businesses, this is a much more expensive form of bankruptcy that is also available to consumers. It requires a repayment plan, which must be approved by the court and signed off on by creditors. If creditors don’t agree to the plan, the court can still confirm the plan by invoking a process called “cram down.” The length of your plan will depend on its complexity. Chapter 11 stays on your credit for seven years from filing, so this can hinder your financial goals for a long time.  

Assess Chapter 7/Chapter 11/Chapter 13 bankruptcy options

In addition to Chapters 7 and 11, you may want to look at Chapter 13 bankruptcy. This is only feasible in certain circumstances. This article comparing Chapter 7 and 13 provides more insight.

To see if either form of bankruptcy would help you manage your current debt, talk to a bankruptcy attorney. Although you can file bankruptcy yourself, the knowledge and experience that a lawyer brings to your case can certainly make the legal fees worth it. And most offer a free, no-obligation consultation so that you can assess your options.

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