What's the difference between Chapter 11 and Chapter 7?

Say Chapter 11 reorganizes a business that keeps operating and Chapter 7 liquidates it. Then cover the debtor in possession, the automatic stay, the plan and class voting, cramdown and the best interests test, and tie the choice to value.

Updated October 20, 2026

What the interviewer listens for

• Do you say Chapter 11 reorganizes and Chapter 7 liquidates?
• Do you name the debtor in possession and the automatic stay?
• Do you know the plan and the voting rule by class?
• Do you mention cramdown and the best interests test?
• Do you tie the choice to going-concern value?

Common mistakes

• Swapping the chapters and calling Chapter 7 the reorganization.
• Saying a company in Chapter 11 shuts down.It keeps operating, paying employees and serving customers.
• Saying a trustee runs a Chapter 11 company.Management normally stays in control as the debtor in possession.
• Getting the vote backwards.It's two thirds by dollar amount and more than half by number of the claims that vote.

Likely follow-ups

• Can a Chapter 11 case end without the company surviving?Yes. Many cases sell nearly everything in a 363 sale and pay out the proceeds through a liquidating plan, or the case converts to Chapter 7.
• What's a prepackaged Chapter 11?The company negotiates the plan and collects creditor votes before it files, then uses the court to confirm it and bind holdouts, often in weeks rather than months.

More finance technicals

• What is a 363 sale?
• A company in Chapter 11 is worth $600 million. Claims are a $50 million DIP, $10 million of admin claims, $300 million of first lien, $200 million of second lien, $150 million of unsecured bonds and $50 million of trade claims. Who recovers what?
• What is DIP financing, and why would anyone lend to a bankrupt company?
• Why would a company try an out-of-court restructuring first?
• What signs tell you a company is heading for distress?

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