Chapter 11 vs Chapter 7: What Each Means for a Company
The chapter a company files under decides who runs it and who gets paid. This side-by-side guide covers employees, customers, suppliers and shareholders.
For a company, Chapter 11 bankruptcy is a reorganization: the business usually keeps operating under its own management while it negotiates a plan to pay creditors. Chapter 7 is a liquidation: a court-supervised trustee takes over, sells the assets and pays creditors in a fixed order. Which chapter a company chose is stated on the petition filed in bankruptcy court.
Both chapters are part of the federal Bankruptcy Code (Title 11 of the US Code), and both are handled in US bankruptcy courts. The US Courts site has official explainers for Chapter 11 and Chapter 7.
What is the difference between Chapter 11 and Chapter 7 for a company?
Chapter 11 is designed to keep a business alive or sell it as a going concern; Chapter 7 is designed to end it. The table compares the two for a corporation.
| Chapter 11 | Chapter 7 | |
|---|---|---|
| Goal | Reorganize debts, or sell the business or its assets under court supervision | Liquidate assets and distribute the money |
| Who runs the company | Usually existing management as “debtor in possession”; a trustee is appointed only in a small number of cases, for reasons such as fraud or gross mismanagement | A trustee appointed by the US Trustee program |
| Does the business keep operating? | Usually yes | Usually no; the court can let the trustee run it for a limited time if that helps creditors |
| Who proposes how creditors are paid | The company has an exclusive 120-day period to file a plan, which the court can extend to no more than 18 months | No plan; the trustee pays claims in the order the Code sets |
| Creditor voting | Creditors vote by class; a class accepts if holders of at least two-thirds in amount and more than half in number vote yes | No vote |
| Discharge of debts | The company emerges under the confirmed plan | Corporations and partnerships get no discharge; the entity is left without assets |
| Can it switch? | A Chapter 11 case can be converted to Chapter 7 | The debtor can ask to convert to Chapter 11 |
A Chapter 11 case can also be used to sell nearly everything. Some retailers have closed all their stores inside Chapter 11 instead of filing under Chapter 7, so the chapter alone does not tell you whether the business will survive.
What happens to customers in each chapter?
In Chapter 11 the business usually keeps serving customers, and companies often ask the court in their first days for permission to keep honoring warranties, refunds, loyalty points or gift cards. Whether those programs continue, and for how long, is decided by court order, not by company policy alone.
In Chapter 7 the business typically stops, and customers with unfilled orders, deposits or gift cards become creditors. Customer deposits for goods or services not delivered have a limited priority in the payment order, but there may be little money to share. Our guide to gift cards in bankruptcy covers the deadlines and how to check the court notice.
What happens to employees?
In Chapter 11, employees usually keep working, and companies often ask the court in their first-day motions for permission to pay wages and benefits owed from before the filing. In Chapter 7, employment generally ends when the business closes.
In both chapters, unpaid wages, salaries, commissions, vacation and severance earned within 180 days before the filing are a priority claim up to $17,150 per person, as of the Judicial Conference adjustment that took effect April 1, 2025 (11 U.S.C. 507(a)(4)). Amounts above the cap are general unsecured claims. Our guide to employee wages in bankruptcy covers 401(k) money and pensions.
What happens to suppliers and other creditors?
Suppliers are usually unsecured creditors in both chapters, paid after secured lenders and priority claims. Goods the company received in the ordinary course of business in the 20 days before the filing get a higher-priority administrative claim under the Code.
In Chapter 11, a committee of unsecured creditors, usually made up of the holders of the seven largest unsecured claims, negotiates on behalf of that group. Suppliers whose products the company cannot easily replace are sometimes paid as “critical vendors” with court approval. In Chapter 7, the trustee collects claims and pays them in order once assets are sold. Either way, a creditor usually has to file a proof of claim by the deadline the court sets; see how to file a proof of claim.
What happens to shareholders?
Shareholders are last in line in both chapters, so their shares are often worth little or nothing. Under the Code’s absolute priority rule, a Chapter 11 plan generally cannot give anything to shareholders over the objection of a creditor class that is not paid in full.
A corporation is legally separate from its owners, so shareholders do not lose personal assets beyond what they invested in the stock, the US Courts explainer notes. Common stock is often canceled under a Chapter 11 plan, and shares of bankrupt companies are frequently delisted from major exchanges during the case. Our guide to what happens to stock in Chapter 11 explains the steps.
How long does each chapter take?
Neither chapter has a fixed length. Chapter 11 cases can run from a few weeks for prepackaged plans, where creditors agree before filing, to more than a year for contested cases. Chapter 7 cases for companies last as long as it takes the trustee to sell assets and resolve claims.
- Meeting of creditors (section 341 meeting) in Chapter 7: held 21 to 40 days after the filing, run by the trustee.
- Chapter 11 exclusivity for the company’s plan: 120 days, extendable to no more than 18 months.
- Small businesses with total debts of $3,424,000 or less can use Subchapter V of Chapter 11, a faster track with a trustee in every case, according to US Courts as of November 2026.
Bottom line
The first court filings in a Chapter 11 case, often called first-day motions, tell customers and employees what the company asked permission to keep paying. In larger cases they are free to read on the website of the claims agent the company hires, and the agent’s address is usually in the company’s press release about the filing.
FAQ
Does Chapter 11 mean a company is going out of business?
No. Chapter 11 is a reorganization, and many companies keep operating through it. Some use it to sell the whole business or close it in an orderly way, so the plan filed in the case is what decides the outcome.
Can a company switch from Chapter 11 to Chapter 7?
Yes. The company has a one-time right to convert, with some exceptions, and creditors or the US Trustee can ask the court to convert or dismiss the case for cause.
Who decides between Chapter 11 and Chapter 7?
The company chooses when it files voluntarily. Creditors can also start an involuntary case under either chapter in some circumstances.
Is Chapter 13 an option for a company?
No. Chapter 13 is for individuals with regular income, not corporations or partnerships. Businesses reorganize under Chapter 11, including its Subchapter V track for small businesses.
