Companies that find themselves in a terrible financial situation in which bankruptcy is their best – or only – option have two fundamental choices: Chapter 7 bankruptcy or Chapter 11 bankruptcy. Individuals can also access both.
Here is an explanation of how these two types of bankruptcy function and how they differ.
Chapter 7 bankruptcy is sometimes known as “liquidation” bankruptcy. Businesses in this sort of bankruptcy have passed the reorganization stage and must sell assets to pay their creditors. Individuals go through the same procedure.
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The bankruptcy court will hire a trustee to ensure that creditors are renumerated in the proper sequence according to “absolute priority.”
In bankruptcy, secured debt takes preference over unsecured debt. Secured debt includes loans made by banks or other financial organizations secured by a specific asset, such as a building or expensive machinery. After all secured creditors have been paid, any remaining assets and cash are pooled and allocated to creditors with unsecured debt. Bondholders and preferred stockholders would be among them.
The debtor can be a corporation, a small firm, or a person to qualify for chapter 7 bankruptcy lawyer Maryland. Individuals are also eligible for Chapter 13 bankruptcy. The debtor agrees to return at least a portion of their obligations over a three- to the five years while being monitored by the court.
Bankruptcy under Chapter 11 is often known as “reorganization” or “rehabilitation” bankruptcy. It is the most complicated and typically the most expensive type of bankruptcy. As a result, corporations, partnerships, joint ventures, and limited liability firms are more likely to employ it than individuals (LLCs).
Unlike Chapter 7, Chapter 11 allows a firm to restructure its debt and resurface as a viable business.
Filing a petition in a bankruptcy court is the first step in a Chapter 11 lawsuit. The petition can be either voluntary, submitted by the debtor, or involuntary, filed by creditors seeking payment. During Chapter 11 bankruptcy, the debtor will continue to operate while taking steps to stabilize its finances, such as lowering spending, selling assets, and attempting to renegotiate obligations with creditors—all under the supervision of the court.
Key Differences Between Chapters 7 and 11
Chapter 11, like Chapter 7, requires the choice of a trustee. Rather than selling off all assets to repay creditors, the trustee controls the debtor’s assets and permits the company to continue.
It is vital to know that in Chapter 11, debt is not discharged. The restructuring amends the terms of the debt; the firm must continue to pay with future earnings.
If a firm is successful with Chapter 11, it continues functioning efficiently with its newly structured debt. If it is not successful, it will file for Chapter 7 bankruptcy and liquidate.
Avoiding Bankruptcy in Florida
Bankruptcy is typically used as a last resort by both corporations and people. A Chapter 7 bankruptcy effectively puts a corporation out of existence, whereas a Chapter 11 bankruptcy may make lenders reluctant to work with the company once it emerges from bankruptcy. A Chapter 7 bankruptcy will be on an individual’s credit report for ten years, whereas a Chapter 13 bankruptcy will appear on their credit report for seven years.
While bankruptcy may be inevitable in many cases, borrowing wisely is one method to avoid it. This could imply refraining from using debt to develop too quickly for a business. For an individual, this may be paying down credit card debt every month and not purchasing a larger home or a more expensive car than they can comfortably afford.
Businesses may choose to speak with an outside counsel specializing in bankruptcy law before filing for bankruptcy, depending on their internal legal resources, and consider any available alternatives. Getting aChapter 7 bankruptcy lawyer in South Floridashould be attended to as early as possible.
Before filing for bankruptcy, individuals are obliged by law to complete an approved credit-counseling course. Individuals can also use other resources, such as a respected debt relief company, to help them negotiate with their creditors. Every year, Investopedia produces a list of the finest debt relief providers.
Are you looking for a Chapter 7 bankruptcy lawyer in South Florida? RLC Lawyers and Consultants is a Florida-based law firm with a broad service range covering Washington, D.C., and Maryland. We also have Chapter 11 bankruptcy attorneys in South Florida. Contact us to assist you through your bankruptcy time. We will make it stressless for you.