Let’s cut to the chase. The main difference between Chapter 11 liquidation and Chapter 7 is that you, as the debtor, remain “debtor in possession.” In other words, you have control over the sale process. You also control the distribution of assets through the bankruptcy court.
In a Chapter 7 case, by contrast, you are immediately taken out of possession. You no longer have right title or interest to any of your assets. In other words, except for special exceptions (known as “exemptions”), you lose control over your real property and personal property. (You also surrender control over your liabilities, but that’s likely much less important.)
Critically and additionally, when you file for Chapter 7, you also no longer control any litigation you’re pursuing. In other words, the bankruptcy trustee can block you from having control or a say about litigation to be pursued.
For instance, let’s say that your husband, Peter, got hit from behind on the New Jersey Turnpike six months ago. The truck driver at fault had been speeding while driving way in excess of allowable hours. The accident left Peter in traction. He had to step down from his lucrative (but intense) position as Vice President of a bank in Manhattan. Peter’s sudden lack of income created a cash flow emergency for the family, prompting the need for debt relief. He initiated a lawsuit against the trucking company to recover damages. However, this might take months or longer to sort out.
If you and Peter file for Chapter 7, you can’t determine a settlement on that lawsuit. The trustee gets to control the outcome.
With a Chapter 11, that loss of control doesn’t happen. You stay in the driver’s seat and manage the liquidation process. Basically, the only way you get bumped out is if you do things that are improper or if you grossly mismanage assets to the detriment of creditors.
However, as we’ve discussed previously, the 11 brings with it higher legal fees, and it’s a more complicated process.
Here’s another example to clarify. You might do a Chapter 11 liquidation if you have a business propped up with a lot of personal guarantees—but selling off the assets of the business wouldn’t be enough to get relief, because creditors are still pursuing you personally. Through a liquidating Chapter 11 plan you can sell off assets to keep the business alive and we can often utilize this process to help you get creditors to take these distributions in exchange for relief from even oyur personal residual liability.
The Lucid Law team is here to help explain the individual Chapter 11 liquidation process in detail. Get clear insight by calling us at (908) 350-7505 today.