What is Difference between Bankruptcy and Bankruptcy Protection

Bankruptcy vs. Bankruptcy Protection

What is Difference between Bankruptcy and Bankruptcy Protection? Bankruptcy refers to the state where an individual or organization can no longer pay their creditors and this has been legally declared to the necessary parties as dictated by the bankruptcy laws of a particular country. In the United States, the law that governs it is the United States Bankruptcy Code but bankruptcy laws may differ from state to state.


Difference between Bankruptcy and Bankruptcy Protection

A person or organization goes bankrupt under chapter 7 of the bankruptcy code when they realize that they have a very large debt and that any chance of recovery is impossible. This is immediately declared bankrupt and the court of that country assigns a person to review all resources and liquidates the resources of that person or corporation. The resulting money is used for administrative expenses while the remaining money is used to agree with the secured and unsecured creditors in their respective order.

On occasion, both individuals and corporations file for bankruptcy protection if they believe they can recover financially, given time and some amount to restructure and reorganize without thinking they are in financial difficulties at that time. People who ask for bankruptcy protection do so under Chapter 13 and organizations do so under Chapter 11. The court, instead of liquidating the resources, asks the company or the individual to draw up a restructuring plan and assign to protect the interests of the other parties such as creditors and shareholders in the case of organizations.

Under chapter 7 bankruptcy, while creditors are assured of being paid, it is not necessary for shareholders to be notified in case of organizations. Under Chapter 11 that pertains to bankruptcy protection, all parties including safe and unsecured creditors as well as shares will be notified of the restructuring plan and these parties need to accept the plan before it is implemented.

Under chapter 7 bankruptcies, once the person or organization is declared bankrupt, all transactions and transactions cease while under chapter 9 or chapter 13 bankruptcy protections, individuals or organizations are allowed normal operation of the business but all significant decisions have to be approved by the court.

In Summary:

  • According to the Bankruptcy Code of the United States, when a person files for bankruptcy under Chapter 7, it is legally declared that the party is unwilling to pay creditors and therefore their resources are settled to pay the debtors. When a person or organization files for bankruptcy protection under Chapter 13 or 11, it is believed that even though they are currently in poor financial condition, they are given time and finances can be reorganized in order to be recoverable.
  • Under Chapter 7 bankruptcy, all operations end after bankruptcy while under chapter 11 and 13 bankruptcy protection, operations can continue normally.
  • Under Chapter 7, shareholders do not have to be notified of what happens while under Chapter 11, shareholders will have to accept the reorganization plan proposed by the company. However, the court has the power to change the denial if it believes it is fair.
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