When you learn that a customer has filed for bankruptcy, one of the first things you need to know is what kind of bankruptcy they filed. The Bankruptcy Code is divided into chapters, each designed for a different type of debtor and a different goal. For business owners who are owed money, the chapter your customer filed determines whether their business will continue operating or shut down immediately, how long the process is likely to take, whether you will have meaningful opportunities to influence the outcome, and what you are realistically likely to receive. Getting this basic orientation right early saves you from misplaced expectations and helps you make strategic decisions about how much effort and legal expense to invest in the case.

This article focuses on the three chapters that business creditors most commonly encounter: Chapter 7, Chapter 11, and Chapter 13. While there are other chapters — Chapter 9 for municipalities, Chapter 12 for family farmers and fishermen, Chapter 15 for cross-border insolvencies — the vast majority of cases involving business customers fall into one of these three. The differences among them are significant enough that knowing which chapter applies is almost as important as knowing the customer filed at all.

Chapter 7: The Liquidation Chapter

Chapter 7 is what most people picture when they think of bankruptcy: the debtor’s assets are gathered, sold, and the proceeds distributed to creditors in a legally prescribed order. The debtor receives a discharge of most remaining debts, and — if the debtor is a business entity — the entity typically ceases to exist. Chapter 7 is available to both individuals and businesses, though there are eligibility requirements for individuals (the means test, which assesses whether an individual has sufficient income to repay debts through a Chapter 13 plan). Business entities have no means test and may file Chapter 7 without a prior income calculation.

The mechanics of a Chapter 7 business bankruptcy work as follows. When the petition is filed, a Chapter 7 trustee is automatically appointed. The trustee is a private individual — typically an attorney or accountant with experience in insolvency matters — who is charged with gathering the debtor’s non-exempt assets, liquidating them, and distributing the proceeds to creditors. The trustee reviews the debtor’s financial affairs, investigates any potential avoidance actions such as fraudulent transfers and preference payments, and manages the claims process. The debtor’s principals have no ongoing management role once a Chapter 7 is filed; the trustee takes over administration of the estate.

For creditors, the Chapter 7 process typically moves on the following timeline. Within about 30 days of the filing, the court schedules a meeting of creditors, known as the Section 341 meeting. Any creditor may attend this meeting and ask the debtor questions under oath. As a practical matter, the meeting is often brief and dominated by the trustee’s questions about the debtor’s assets. Following the 341 meeting, the trustee conducts investigations and, if assets are located, begins the process of liquidating them. If the case has assets, the court will set a bar date for claims — typically 70 to 90 days after the petition date in asset cases — and creditors must file proofs of claim before that date to participate in the distribution.

The harsh reality of Chapter 7 cases for unsecured trade creditors is that many of them are ‘no-asset’ cases: the trustee determines that there are no non-exempt assets to administer, files a report saying so, and the case is closed with no distribution to unsecured creditors. In these cases, creditors receive nothing, and the debtor receives a discharge of most debts. If you are an unsecured creditor in a no-asset Chapter 7 case, you will typically receive a notice from the court indicating that no assets are available and that there is no need to file a proof of claim. Keep that notice for your records and write off the debt. There is no realistic path to recovery.

If the trustee does identify assets — real estate, equipment, accounts receivable, avoidance action recoveries, intellectual property — the case becomes an asset case and you have a chance to participate. File your proof of claim by the bar date. The trustee will liquidate the assets over time, pay administrative expenses and priority claims, and then distribute the remainder pro rata to allowed general unsecured claims. Distributions in even asset-rich Chapter 7 cases often result in only fractional recovery for unsecured creditors. You may receive 10 cents on the dollar. You may receive 50 cents if the estate is well-funded and unsecured claims are relatively modest. Rarely do unsecured creditors recover their full claim in a Chapter 7 liquidation.

Chapter 11: The Reorganization Chapter

Chapter 11 is the most complex and consequential form of bankruptcy for business creditors. It is the reorganization chapter: rather than immediately shutting down and liquidating, the debtor continues operating its business while proposing a plan of reorganization to pay creditors and restructure its obligations over time. Chapter 11 is available to businesses of any size and to individuals whose debts are too large to qualify for Chapter 13. While many large, publicly traded companies use Chapter 11, it is also regularly used by small and mid-sized businesses.

When a Chapter 11 petition is filed, the automatic stay goes into effect and the debtor continues operating as a ‘debtor-in-possession.’ The debtor-in-possession, managed by its existing officers and directors, has most of the powers of a bankruptcy trustee and can operate the business, enter into contracts, and manage its affairs in the ordinary course — subject to court oversight and the requirements of the Bankruptcy Code. A trustee is not automatically appointed in Chapter 11; appointment of a Chapter 11 trustee requires a specific finding of cause, such as fraud, dishonesty, or gross mismanagement by the debtor.

In many large Chapter 11 cases, the court will appoint an official committee of unsecured creditors, typically composed of the seven largest unsecured creditors willing to serve. This committee has substantial powers: it is entitled to be consulted on major decisions, it has the right to review the debtor’s financial information, it can retain its own professionals (paid by the debtor’s estate), and it participates in the plan negotiation process. If you are a large creditor, you may be asked to serve on this committee. Service has benefits — access to information and influence over the reorganization — but also requires a significant time commitment and imposes certain obligations. Consult with your attorney before agreeing to serve.

The centerpiece of a Chapter 11 case is the plan of reorganization. The debtor has the exclusive right to file a plan for an initial period (usually 120 days after the filing, extendable by the court) and an exclusive right to solicit acceptances for an additional period (usually 180 days total). The plan specifies how different classes of creditors will be treated — which creditors will be paid in full, which will receive partial payment, how secured creditors’ claims will be handled, and what equity holders will receive, if anything. Creditors whose claims are impaired by the plan — meaning they receive less than full payment — are entitled to vote on whether to approve it.

For a plan to be confirmed, it must satisfy a number of requirements under the Bankruptcy Code. Creditors in each impaired class must either vote to accept the plan (which requires affirmative votes from more than half in number and at least two-thirds in dollar amount of claims in the class), or the plan must be confirmed over the objection of a rejecting class through the ‘cramdown’ process, which imposes additional substantive requirements. Confirmation of a plan is a significant legal event that results in the binding, court-ordered restructuring of all debts and the emergence of the reorganized debtor from bankruptcy.

For trade creditors in Chapter 11 cases, the practical realities vary widely depending on the size of the case and the debtor’s financial condition. In successful reorganizations, unsecured creditors may receive meaningful distributions — perhaps 30 to 80 percent of their pre-petition claims, paid over several years — plus the opportunity to continue doing business with a reorganized customer that has shed its debt burden and is financially healthier. In failed reorganizations, a Chapter 11 may convert to Chapter 7, resulting in a full liquidation with the distribution characteristics described above. In some cases, creditors receive equity interests in the reorganized company rather than cash, which may eventually be worth something but carries its own risks.

Subchapter V: The Small Business Fast Track

Congress created Subchapter V of Chapter 11 in 2019 under the Small Business Reorganization Act to provide a faster, less expensive reorganization process for small businesses. Subchapter V is available to business debtors (and qualifying individuals) with total debts below a statutory threshold. The threshold has fluctuated due to temporary COVID-era adjustments, but for most of the recent past has been set at approximately $7.5 million in aggregate debts, with a current reading closer to $3 million in its unextended form. If your customer is a small business and files under Subchapter V, the process is streamlined: a trustee is appointed to facilitate plan negotiations (though the debtor remains in possession), the debtor has an exclusive right to file a plan within 90 days, and the plan does not require approval from a class of unsecured creditors if it meets certain fairness requirements. For creditors, Subchapter V cases move faster than traditional Chapter 11 cases, which can be both good (faster resolution) and less favorable (less time to investigate and negotiate).

Chapter 13: Reorganization for Individuals

Chapter 13 is a reorganization chapter available exclusively to individuals — not corporations or partnerships — who have regular income and whose debts fall below statutory limits. The current limits are approximately $465,000 for unsecured debts and approximately $1.4 million for secured debts, though these figures are adjusted periodically. Chapter 13 allows individuals to propose a plan to repay all or a portion of their debts over three to five years from their disposable income, while keeping property they would otherwise lose in a liquidation.

For business creditors, Chapter 13 cases arise most commonly in two contexts. First, you may have extended credit to an individual who operates as a sole proprietor or who personally guaranteed a business debt, and that individual files a Chapter 13 case. Second, your corporate customer may go bankrupt and its owner or principal separately files a Chapter 13 case to deal with personal debts, including personal guarantees on the business debt. Chapter 13 cases are generally less complex than Chapter 11 cases and move faster, though the available distributions to unsecured creditors may be similarly limited by the individual debtor’s income and expenses.

One important feature of Chapter 13 cases for business creditors is the co-debtor stay, which protects co-signers and guarantors of consumer debts from collection activity while the Chapter 13 case is pending. If an individual files Chapter 13 and you are trying to collect a consumer debt that was co-signed by another individual, that co-signer is protected by the stay as long as the Chapter 13 case is active. This is a broader stay than applies in Chapter 11, and it can delay your ability to pursue guarantors.

In Chapter 13, unsecured creditors receive distributions through the trustee based on the debtor’s projected disposable income over the plan period. General unsecured creditors as a class must receive at least as much as they would have received in a Chapter 7 liquidation of the debtor’s assets, and the debtor must devote all projected disposable income to the plan for its duration. The practical consequence for business creditors is that Chapter 13 distributions can be small if the individual debtor has limited income and significant secured or priority debts.

Comparing the Three Chapters: A Summary

The following comparison helps illustrate the key differences from a creditor’s perspective. Chapter 7 is characterized by speed — the process typically concludes within a few months to a year — but offers the lowest chance of meaningful recovery for unsecured creditors. The business ceases to exist, so there is no ongoing relationship to preserve. Chapter 11 is characterized by complexity and length — cases can last from several months to multiple years — but offers the best opportunity for significant creditor participation and recovery, particularly for large creditors who can afford to engage meaningfully in the process. The debtor continues to operate, which means the business relationship may continue and post-petition purchases are administrative expenses with priority status. Chapter 13 is a moderate-speed process applicable only to individuals, offering unsecured creditors distributions from the debtor’s income over three to five years, with recovery rates that vary considerably depending on the individual debtor’s financial circumstances.

What to Do When You Find Out Which Chapter Was Filed

Once you know the chapter, you can calibrate your response appropriately. In a Chapter 7 case, your primary task is to determine quickly whether it is an asset case or a no-asset case, file your proof of claim if a bar date is set, and begin the process of writing off the bad debt if no assets are available. In a Chapter 11 case, your tasks are broader: file a proof of claim, consider whether to seek appointment to the unsecured creditors’ committee if you are a large creditor, monitor the case docket for important filings, assess whether to continue doing business with the debtor-in-possession, and engage actively in the plan confirmation process, including voting when the time comes. In a Chapter 13 case, file a proof of claim by the bar date and monitor the plan for the treatment of your claim.

In all three cases, the engagement of experienced bankruptcy counsel early in the process makes a significant difference. The rules are different for each chapter, the opportunities available to creditors are different, and the consequences of missed deadlines and procedural missteps are equally serious regardless of which chapter applies. Understanding which chapter applies is the beginning of your strategy, not the end of it.