Difference Between Bankruptcy and Bankruptcy Protection

Bankruptcy vs Bankruptcy Protection

Bankruptcy refers to a state wherein an individual or organization is no longer able to repay his creditors and this has been legally declared to the necessary parties as per the bankruptcy laws of that particular country. In United States, the governing law is the United States Bankruptcy Code but bankruptcy laws can differ from State to State.

An individual or organization is declared bankrupt under Chapter 7 of the Bankruptcy Code when it is realized that they are deep in debt and any steps for recovery is impossible. This then calls for a straightforward bankruptcy wherein the court appoints a trustee who reviews the assets and liquidates the assets of the individual or the corporation. The resulting money is used to settle administrative expenses while the remaining money is used to settle the secured creditors and the unsecured creditors in the respective order.

Sometimes, both individuals and corporations file for bankruptcy protection if they believe they can recover financially, given some time and some amount of restructuring and reorganization despite being in dire financial straits right now. Individuals file for bankruptcy protection

under Chapter 13 and organizations file for bankruptcy protection under Chapter 11.The court, instead of liquidating the assets, requests the company or the individual to come up with a re-structuring plan and it also assigns a committee from its side to protect other parties’ interests such as creditors and shareholders in the case of organizations.

Under Chapter 7 bankruptcy, while secured creditors will be paid first followed by unsecured creditors who have made claims, it is not necessary for shareholders to be notified in the case of organizations. Under Chapter 11 which pertains to bankruptcy protection, all parties including secured and unsecured creditors as well as shareholders will have to be notified of the restructuring plan and these parties need to accept the plan before it is implemented.

Under Chapter 7 bankruptcy, once an individual or organization is declared bankrupt, all operations and transactions cease whereas under Chapter 9 or Chapter 13 bankruptcy protection, individuals and organizations are allowed to continue their normal operations but all significant decisions have to be approved by the Court.

Summary:
1. As per the United States Bankruptcy Code, when an individual files for bankruptcy under Chapter 7, it is legally declared that the party is unable to repay creditors and therefore the assets are liquidated to pay the debts. When individuals or organizations file for bankruptcy protection under Chapter 13 or Chapter 11, they believe that despite being in poor financial conditions currently, given some time, the finances can be reorganized to prove profitable.
2. Under Chapter 7 bankruptcy, all operations cease post filing for bankruptcy whereas under Chapter 11 or Chapter 13 of bankruptcy protection, post filing operations will continue as normal.
3. Under Chapter 7, stockholders do not have to be notified whereas under Chapter 11, stockholders will have to accept the reorganization plan proposed by the company. However, the Court has the power to overrule the rejection if it thinks it is fair.

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