The short answer: Chapter 7 is liquidation meant to wipe out qualifying debts quickly, while Chapter 11 is reorganization built to keep a business running while it restructures what it owes. Both are governed by the federal U.S. Bankruptcy Code and handled in federal bankruptcy court, but they serve very different goals. Most individual consumers who file end up in Chapter 7 or Chapter 13; Chapter 11 is primarily a tool for businesses and a smaller number of high-debt individuals.
Below we break down how each chapter actually works, who qualifies, what happens to your property and your business, and how to figure out which path fits your situation. This is general information to help you ask better questions, not legal advice for your specific case.
The Core Difference: Liquidation vs. Reorganization
Every bankruptcy chapter is named after a section of the federal Bankruptcy Code. The two chapters here answer fundamentally different questions:
- Chapter 7 asks: "What can be sold to pay creditors, and which debts can simply be erased?" A court-appointed trustee can sell your non-exempt property, distribute the proceeds to creditors, and then discharge most remaining qualifying debt. It is fast and final.
- Chapter 11 asks: "How can this business (or person) keep operating while paying creditors over time under a court-approved plan?" Instead of liquidating, the debtor proposes a plan of reorganization that restructures debts, contracts, and operations.
Think of Chapter 7 as a clean break and Chapter 11 as a supervised turnaround. A bakery drowning in debt could close and liquidate under Chapter 7, or it could file Chapter 11 to renegotiate its lease, cut some debt, and stay open.
Chapter 7: How Liquidation Works
Chapter 7 is the most common consumer bankruptcy. When you file, an automatic stay immediately stops most collection activity, including calls, lawsuits, wage garnishment, and foreclosure efforts, at least temporarily. The Fair Debt Collection Practices Act (FDCPA), enforced by the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), already limits abusive collection, but the bankruptcy stay is a separate, powerful federal protection that applies to all creditors.
A trustee reviews your assets. Property you can keep is protected by exemptions. Federal exemptions exist, but many states have their own exemption systems, and some require you to use the state list. What you can protect, such as home equity, a vehicle, retirement accounts, and household goods, varies significantly by state, so the same case can have very different outcomes depending on where you live. Do not rely on a specific dollar figure you read online; confirm your state's current rules.
Who Qualifies for Chapter 7
Individuals must generally pass a means test, which compares your income to the median income for your household size in your state. If you earn below that median, you typically qualify. If you earn above it, a more detailed calculation determines eligibility, and you may be steered toward Chapter 13 instead. Businesses can also file Chapter 7 to shut down and liquidate, but a corporation or LLC does not receive a discharge the way an individual does; it simply winds down.
What Chapter 7 Does and Doesn't Erase
- Often dischargeable: credit card balances, medical bills, personal loans, and most older unsecured debt.
- Usually not dischargeable: most student loans (absent a separate hardship showing), recent tax debts, child support and alimony, and debts from fraud.
- Secured debt: if you want to keep a financed car or house, you generally must stay current and may need to reaffirm the debt; otherwise the lender can repossess or foreclose once the stay lifts.
A typical individual Chapter 7 case moves quickly, often concluding within a few months of filing.
Chapter 11: How Business Reorganization Works
Chapter 11 lets a struggling business keep its doors open while it restructures. In most cases the existing management stays in control as the "debtor in possession," running the company under court supervision rather than handing it to a trustee. The same automatic stay applies, freezing creditor actions so the business has breathing room.
The heart of a Chapter 11 case is the plan of reorganization. This document spells out how the business will pay creditors, which debts will be reduced or stretched out, which contracts and leases it will keep or reject, and how the company will operate going forward. Creditors are grouped into classes and may vote on the plan, and the bankruptcy judge must confirm it. A confirmed plan is binding on creditors even if not all of them agreed.
Why Chapter 11 Is More Complex and Costly
Chapter 11 involves ongoing reporting, creditor committees in larger cases, professional fees, and extended court oversight. It is powerful but expensive and time-consuming compared with Chapter 7. That cost is why traditional Chapter 11 historically made sense mainly for mid-size and large companies.