Bankruptcy Chapters
Lesson:
Bankruptcy is a legal process governed by federal law that helps individuals or businesses who cannot fully repay their debts to obtain relief from creditors and either restructure or eliminate obligations. Upon filing, an automatic stay goes into effect, halting most collection actions, lawsuits, wage garnishments, and debt pursuits while the case proceeds.
- Chapter 7 bankruptcy, also known as "liquidation," involves a court-appointed trustee selling the debtor’s non-exempt assets to pay creditors, after which most unsecured debts are discharged.
- Chapter 11 bankruptcy, known as "reorganization," allows a debtor (typically a business) to restructure debts and operations under court supervision while remaining in control of the business, subject to creditor and court approval.
An easy way to remember this is that, numerically, 7 comes before 11 in the same way that, alphabetically, liquidiation comes before reorganization.
You're an accountant trying to understand which laws might be relevant to a potential bankruptcy.
Here are the relevant facts:
- A self-employed contractor, unable to meet loan repayments after a project failure, reorganizes their financial obligations to ensure a manageable path to debt repayment.
Which type of bankruptcy is most likely to apply in this case?
Answer:
- Chapter 11 bankruptcy
Explanation:
-
Chapter 11 bankruptcy, known as "reorganization," allows a debtor (typically a business) to restructure debts and operations under court supervision while remaining in control of the business, subject to creditor and court approval.