Bankruptcy is legal status in which a person or entity is not able to pay off the debts owed to the creditors. The court imposes bankruptcy, and the debtor initiates the process in almost all cases. It is legally claiming that you are not able to pay back your debt and thereby it is legal refusal to pay back debts and seeking refuge in the eyes of the law. As far as the law is concerned there a lot of chapters that deal with the process of bankruptcy. So depending on the chapter that governs your cases, your debts are treated. To make things even more understandable, let us discuss in detail about Chapter 7 and Chapter 11 of Bankruptcy.
When the financial position of an individual or entity is sick, and there are no other possible options apart from liquidation that when Chapter 7 is executed. The Chapter 7 Bankruptcy is also known as Liquidation Bankruptcy. Any entity going through this form of bankruptcy must sell off all the assets to pay the creditors. However, if some of the assets are specifically exempt from this list, the entity can still have that asset under its ownership or simply sell and own the money. In simple terms, creditors cannot claim payment from such assets. According to chapter 7, the loan is supposed to be repaid in the process of ‘absolute priority,’ this means that the creditor collects the debts in the order in which he loaned out.
As stated earlier there a lot of other option apart liquidation, when the court declares insolvency. One such strategy is what chapter 11 talks about. Chapter 11 bankruptcy details with Rehabilitation bankruptcy. In rehabilitation bankruptcy, the entity doesn’t liquidate instead it merges with a healthy organization and survives. All entities try their best to get relief under Chapter-11 because the organization still lives even after a bankruptcy notice has been served. Here the going-concern of the organization is not affected.
A lawyer will present analysis between the chapters that deal with bankruptcy and will help you pick the right option. It is always better to look for multiple expert opinions before you drop down to a conclusion.