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What is the difference between business and personal bankruptcy?

On Behalf of | Feb 6, 2024 | Uncategorized

You likely already know that bankruptcy is available for both individuals and businesses. However, can you differentiate between these two processes of eliminating debt?

The obvious difference is that when a person files for bankruptcy, that is personal bankruptcy and when a commercial organization does it, it’s known as business bankruptcy. However, there are more detailed differences between these two processes that organizations and individuals should be aware of.

Chapter 13 (generally) only applies to personal bankruptcy

Two of the most available bankruptcy chapters that you’ve likely heard about are Chapter 7 and 13 bankruptcies. Of these two, Chapter 13 only applies to personal bankruptcy, while Chapter 7 can apply to businesses and individuals. Chapter 13 can be filed by business owners who are sole proprietors, however.

Chapter 13 bankruptcy is uniquely designed to cater to individuals who have a consistent source of income and can better manage their debt with a personalized repayment plan. In fact, it’s commonly referred to as the wage earner’s debt management plan. Suppose you choose this debt management plan; you can expect to pay some debts and enjoy an improved financial outcome.

Chapter 11 (generally) only applies to business bankruptcy

Chapter 11 bankruptcy is a lesser-known form of debt management because it’s almost exclusively reserved for businesses. This category for businesses shares some similarities with Chapter 13 personal bankruptcy because both plans allow filers to reorganize their debts. When a commercial organization files for Chapter 11, it may reorganize certain assets to pay off existing debts. How this works is that both the creditor and debtor propose reorganization plans and the creditor approves which of the plans will be implemented.

Different outcomes to Chapter 7

Both businesses and individuals can file for Chapter 7 bankruptcy, all with a different outcome. When an individual files for this chapter, some of their debts may qualify for discharge. On the other hand, when a business files for this chapter, the commercial organization and its operation will be dissolved as the outcome of the chapter. This is why most businesses prefer to file for Chapter 11 instead of Chapter 7 bankruptcy.

If you’re struggling with debt as an individual or a commercial organization, it helps to know which bankruptcy chapter is most suitable for your unique situation. By scheduling a consultation with a legal professional, you can gain access to the knowledge and insights you need to make an informed choice.