Are you considering filing for bankruptcy?
This is a common occurrence in the USA and was especially crucial for many families during the recession of 2020. If you feel you can’t pay your debts and are having cash flow problems, you might want to consider filing for bankruptcy.
The two most common routes are Chapter 11 and Chapter 7 bankruptcy. It’s imperative that you decide which is the best route for you.
Here are the key differences between filing Chapter 11 and filing Chapter 7 bankruptcy:
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is the most complex type of bankruptcy. As such, it’s often the most costly.
This is when a business wishes to reorganize its debt and continue operating. Individuals can also use Chapter 11 bankruptcy, but this is more common with companies.
During the court proceedings, you can remain in business. You’ll be expected to pay off as much debt as possible during the proceedings. This can include cutting expenses, cutting staff, selling your assets, etc.
You can expect Chapter 11 bankruptcy to be a lengthy process. As such, you want to speak to a financial advisor and a lawyer before you choose this option.
Chapter 7 Bankruptcy
The Chapter 7 bankruptcy definition is when an individual or business attempts to pay off their debts as fast as possible. Individuals and businesses that choose Chapter 7 bankruptcy usually try to pay off their debts by selling their assets.
The bankruptcy court will oversee that the individual or business pays off creditors in a certain order.
This supervision will be the responsibility of a trustee who gets appointed by the court. You’ll work with the court to pay off your debts over an extended period of time with the supervision of a trustee.
With this form of bankruptcy, you’ll still owe the debt but you’ll have much longer to pay it off. It’s a great relief for an individual or business that has cash flow troubles.
Which to Choose?
Now that you know what is Chapter 7 bankruptcy versus Chapter 11, you’re wondering which is best for your situation.
For many businesses, filing Chapter 11 is preferable because it allows you to continue operating your business.
In the event that Chapter 11 isn’t granted, you might be able to file for Chapter 7 instead. Only your financial advisor and an attorney can guide you on what steps to take.
You have to ultimately choose what’s most comfortable for you. For experienced entrepreneurs, it might be preferable to choose Chapter 11 bankruptcy.
Chapter 7 is often preferable for most individuals who haven’t had experience with cash flow troubles. The stress of debt can often overwhelm the average person. Having a trustee supervising you can be a great relief during the bankruptcy process.
Filing for Bankruptcy
Now that you know the differences between Chapter 11 and Chapter 7 bankruptcy, you can choose which route is best for you.
As always, make sure you consult with an attorney and financial advisor before making this difficult decision. You also want to find a way to avoid bankruptcy in the future.
It’s always best to live below your means. You want to make sure you and your business have enough savings to handle emergencies. Make sure you figure out a way to bring in consistent cash flow.
You can find more tips on financial management on our website.