Chapter 11 vs Chapter 7 for businesses

Chapter 11 of the Bankruptcy Code generally provides for reorganization, usually of a corporation or partnership. A sole proprietorship may use it too.

In Chapter 11, a plan of reorganization is proposed, creditors whose rights are affected may vote on it, and the court may confirm the plan if it gets the required votes and meets certain legal requirements. A plan that liquidates the business is also allowed.

Chapter 7 provides for liquidation: the sale of the debtor's nonexempt property and the payment of the proceeds to creditors. The debtor may be an individual, a partnership, a corporation or another kind of business.

A Chapter 7 discharge, which releases a debtor from certain debts, is only for individual debtors. A partnership or a corporation does not get one.

In Chapter 11, the debtor usually stays in charge as the "debtor in possession". It may keep operating its business and, with the court's approval, borrow new money.

A trustee takes over a Chapter 11 business only in a small number of cases, for cause such as fraud, dishonesty, incompetence or gross mismanagement. The U.S. trustee watches over the case and appoints a committee of creditors, usually unsecured creditors.

In Chapter 7, an impartial case trustee runs the case and sells the debtor's nonexempt property. The court may let the trustee operate the business for a limited time, if that helps creditors and the sale.

A Chapter 11 business may keep operating while the case goes on. The case aims at a plan the court confirms. The debtor also has a one-time right, with some exceptions, to convert the case to Chapter 7.

In Chapter 7, filing the petition automatically stops most collection actions against the debtor. The trustee sells the property and pays creditors in a set order: each class must be paid in full before the next lower class is paid anything.

The Chapter 7 page notes that a business that would rather stay in business and avoid liquidation should consider Chapter 11.

NewsIntel lists the Chapter 11 cases of businesses that it finds in CourtListener's RECAP archive, a free public archive of federal court dockets, going back 24 months at most. Chapter 7 cases and cases filed by individuals are not shown, and a case that is not in RECAP is not shown either.

A filing on a company page shows the day it was filed, the chapter, the court and the case number, with a link to the docket. Read the docket for what happened after the filing.

We show that a case was filed, not how it ended. A Chapter 11 filing does not by itself mean the business closed: the debtor usually keeps running the business while the case goes on.