Bankruptcy is a legal tool that helps individuals and entities get out of intractable debt and get a fresh start. But despite the fact that bankruptcy is available both for personal debt and business debt, there is a big difference in the rules between the two, as well as the outcomes.

Let’s look at the shared terminology, and the differences, between the two.

Chapter 7 Bankruptcy

Whether you are filing for personal bankruptcy or a business bankruptcy, when there’s no hope of debts being repaid, the bankruptcy filing falls under Chapter 7. When an individual files for bankruptcy, they must undergo a means test to determine whether they qualify for Chapter 7 or whether they qualify for a repayment plan under Chapter 13. If they have no hope of paying off their debt, then they qualify for Chapter 7, their debts are discharged, and they have the chance of starting over with a fresh slate (but a credit rating that will need to be restored over time).

A business does not have to prove their financial woes to qualify for a Chapter 7 bankruptcy, but this type of filing does not provide a fresh start: A Chapter 7 business bankruptcy results in the business being dissolved.

Chapter 13 and Chapter 11 Bankruptcies

For an individual, the alternative to a Chapter 7 bankruptcy is a Chapter 13 bankruptcy, which allows for the improvement of the person’s financial situation through the establishment of a payment plan to pay off their creditors. This is for those whose financial situation is bad, but not hopeless. Generally, people who take a means test and who are shown to qualify for a Chapter 13 bankruptcy have enough income that, with careful budgeting, will allow them to repay their debts.

When a business needs this same type of payment play, the appropriate filing is known as a Chapter 11 bankruptcy. Rather than shutting down the business (as Chapter 7 bankruptcy does), a Chapter 11 bankruptcy allows for a reorganization of the business’ debts subject to approval by the organization’s creditors. A Chapter 11 bankruptcy often includes the liquidation of assets in order to raise capital for repayment of debt.

If you are considering filing for bankruptcy, it’s essential that you go into the process with your eyes wide-open and aware of all the intricacies, procedures and pitfalls that are involved. For legal guidance, call the law office of Reinherz & Associates today.