Understanding Bankruptcy
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Chapter 11 vs. Chapter 7 Bankruptcy: What to Know

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If you’ve found yourself drowning in large amounts of debt, you are undoubtedly overwhelmed about how to get out of it. Bankruptcy is a federal legal protection that is in place to help individuals or businesses who can’t pay back their debts.

We’ll explain and compare the pros and cons of two of the most common types — Chapter 11 and Chapter 7 bankruptcy — in an effort to help you determine if one of these may be the most appropriate step for your financial situation.

What is Chapter 11 bankruptcy?

Chapter 11 bankruptcy is a form of bankruptcy that exists to allow businesses and corporations to follow a plan to rehabilitate or reorganize their processes so that they can continue to remain in operation while repaying their debt.

Most people who file for Chapter 11 bankruptcy do so because their debt is well over the allowable limit to apply for Chapter 13 bankruptcy. While it’s usually reserved for large companies, occasionally, individuals like small business owners or real estate investors will need to consider filing for Chapter 11 bankruptcy.

Through Chapter 11 bankruptcy, businesses can possibly adjust the terms on their existing debts, such as interest rates and payment amounts. Any loans with unaltered terms are required to be paid within five years of filing for bankruptcy.

After you’ve initially filed for Chapter 11 bankruptcy, you’ll be the one to propose a modified plan to repay your creditors. At least half of your creditors who own at least two-thirds of your debt must accept the plan, or allow you to modify it until you reach an agreement. Once your plan has been accepted, you’ll make your payments for up to five years.


  • Chance to reorganize debts: Chapter 11 bankruptcy can allow you to adjust interest and payment amounts in a way that might be more manageable for you. This can also be beneficial for landlords, since adjusting mortgage terms can help them to become profitable again.
  • Automatic stay: After five years, you’ll be fully discharged from loans with terms that have not been modified. This means most collections actions against you should stop.
  • Shouldn’t affect your personal credit score. If you file for Chapter 11 bankruptcy as a corporation or business, it shouldn’t affect your personal credit score.
  • You can have some control over what happens to your assets. With Chapter 11 bankruptcy, you can opt to liquidate or sell some of your business assets to repay your creditors.


  • Stays on credit report for 10 years: This can be especially discouraging if you file as an individual since your score may be hit pretty hard.
  • Potential delay in applying for a mortgage: You could end up having to wait up to four years after discharging your bankruptcy to get a new mortgage.

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is often referred to as straight or liquidation bankruptcy. It’s characterized by the fact you may have to sell some of your assets to pay off your debt. This only includes assets that are not exempt (examples of exempt property include cars, work-related equipment and furniture from your home). This type of bankruptcy may help you get rid of unsecured debt as well as stop situations such as foreclosures, repossessions, utility shut-offs and debt collection activities.

People who file for Chapter 7 bankruptcy typically earn lower incomes and can’t repay their debts. To qualify for Chapter 7 bankruptcy, you must be earning less than your state’s median income for a family or household of your size. In nearly all cases, you will be discharged of all your outstanding debt after filing for Chapter 7 bankruptcy, allowing you to start fresh and rebuild your credit and savings. But it’s important to understand that this type of consumer bankruptcy won’t clear you of certain responsibilities such as child support, taxes, alimony and certain student loan requirements.


  • No repayment: Because you’ll be selling your assets to repay your creditors, you won’t have to work out a repayment schedule for your debts. Instead, you’ll be relieved of those debts.
  • No maximum debt limit: You can apply with high amounts of consumer debt.


  • Property liquidation: The sale of your assets is what prevents you from having to make payments to your creditors.
  • Income status requirements: Chapter 7 bankruptcy is limited to those with low income and minimal assets.
  • You must take a credit counseling course: According to the Federal Trade Commission, you must take a credit counseling course from a government-approved organization within six months before filing for bankruptcy.
  • Stays on credit report for up to 10 years: Because of this, filing for Chapter 7 bankruptcy may make it difficult for you to get credit or insurance, and may even make it challenging to be hired for a new job or get approved to rent a new apartment.

What about Chapter 13 bankruptcy?

A third type of bankruptcy is Chapter 13 bankruptcy. This option is different in that it allows you to create a repayment plan based on your anticipated income. In many cases, you’ll pay off most of your debt with monthly payments over the course of three to five years, after which time the rest of your debt is discharged.

An advantage of Chapter 13 bankruptcy is that it allows you to retain your assets, such as your house or car. Most individuals or businesses qualify for Chapter 13 bankruptcy. A common use for it is to save a home from foreclosure. You can qualify if you have less than $394,725 in unsecured debt (like credit cards or personal loans) and $1,184,200 in secured debt (like a car loan or mortgage).

If you’ve been discharged from Chapter 13 or another type of bankruptcy within the last two to four years, you may not qualify to file.

Tips to head off bankruptcy

While filing for bankruptcy can certainly bring relief to certain cases of extreme debt, it should remain a last resort. You’ll want to do everything possible to avoid filing for bankruptcy. Here are some alternative options:

  • Work with your creditors: Consider picking up the phone and calling your credit card company to try to negotiate on a solution. It’s possible they will be willing to work with you to settle on a lower interest rate, lower your monthly payment or even reduce your balance.
  • Debt consolidation: Consider a personal loan to consolidate your debt into one balance. This can help you save on interest and pay back your debt without having to give anything up as collateral.
  • Cut expenses: Whether it’s giving up cable, limiting the number of nights you eat out every week or swapping a pricey gym membership for a more affordable option, there are ways you can cut down on your monthly expenses.
  • Find a side job: From tutoring to dog walking or even driving for Uber, there are a number of side hustle options to choose from these days.

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