Question

1) When it comes to bankruptcy, there are 2 types, They are Chapter 7 and Chapter 11. What is the difference in the two? What sort of protections does each offer the entrepreneur?

Answer 1

Chapter 7 bankruptcy is also known as liquidation and chapter 11 as reorganization. It deals with straight bankruptcy and calls for the liquidation of all assets to satisfy the outstanding debts. But chapter 11 deals with reorganization and under this type, the business continue operating. In this type, debtor attempts to formulate a plan to pay a portion of the debts, have the remaining sum discharged and continue to stay in operation. Liquidation offers the protection to the debtor by liquidating the entire business to pay the creditors. The creditors are paid according to the absolute priority and a trustee is appointed to ensure liquidation and payment to the creditors. But chapter 11 allows the debtor to continue the business as a debtor in possession where the court appoints a trustee to oversee the management of the business. The plan is submitted to creditors and once the creditors holding two-thirds of the amount and one-half of the number of each class of claims impaired by the plan accept the plan, it goes for confirmation to the court. The debtor has to carry out the plan after court confirms it. In both types, the proceedings may be either voluntary or involuntary. In voluntary bankruptcy, the debtor files the petition with the bankruptcy court and in involuntary bankruptcy, the creditor force the debtor into bankruptcy.