Chapter 7 vs Chapter 11 vs Chapter 15

Liquidation, reorganization, and cross-border cases — what each chapter means for assets, creditors, and equity.

When a company cannot service its obligations, the path it takes through the U.S. Bankruptcy Code determines whether the business survives, who gets paid in what order, and whether equity holders recover anything. The chapter 7 vs chapter 11 distinction is the most consequential fork in that path, and Chapter 15 governs an increasingly common third scenario: foreign companies with U.S. creditors or assets. Each type shows up as a disclosure event in court filings and SEC reports — the kind of structured signal tracked in Alphanume's corporate default events dataset.

Chapter 7: liquidation

Chapter 7 is the terminal outcome. The debtor surrenders control of the estate to a court-appointed trustee, whose sole mandate is to convert assets into cash and distribute the proceeds to creditors according to the statutory priority waterfall. The company does not emerge from Chapter 7 — it ceases to exist.

The trustee's process follows a defined sequence:

1. An automatic stay halts all collection actions and pending litigation against the debtor on the petition date.
2. The trustee inventories and liquidates assets — through auction, private sale, or abandonment of assets with no realizable value.
3. Proceeds are distributed in priority order: secured creditors first (up to the value of their collateral), then administrative claims, then unsecured priority claims such as wages and taxes, then general unsecured creditors, and finally equity — if anything remains.

In practice, equity holders in Chapter 7 cases recover nothing. The absolute priority rule is strictly applied: no class below receives a distribution until every senior class is paid in full. For most liquidating companies, secured and unsecured creditors themselves receive only cents on the dollar, leaving the residual for equity at zero.

Chapter 11: reorganization

Chapter 11 allows a company to continue operating while it restructures its debt under court supervision. Management typically remains in place as "debtor in possession," retaining operational control subject to certain court approvals. The goal is a confirmed plan of reorganization that impairs or exchanges existing claims in exchange for allowing the business to survive as a going concern.

The core mechanics differ sharply from Chapter 7. Rather than liquidating, the debtor negotiates with creditors — often through a pre-arranged or pre-packaged plan developed before the filing — to reduce the face value of debt, extend maturities, or convert debt to equity. The company emerges as a restructured entity, often with a significantly reduced balance sheet.

Chapter 11 is the preferred route for large public companies because going-concern value typically exceeds liquidation value. A retailer's brand, lease portfolio, and customer relationships are worth more as a continuing operation than as auction lots. For a deeper treatment of that tradeoff, see the discussion of liquidation versus reorganization.

Chapter 15: cross-border insolvencies

Chapter 15 was added to the Bankruptcy Code in 2005 to implement the UNCITRAL Model Law on Cross-Border Insolvency. It does not create a full U.S. bankruptcy proceeding — instead, it provides a mechanism for foreign insolvency representatives to obtain U.S. court recognition of a foreign main proceeding, and with that recognition, access to U.S. courts and the automatic stay.

The key concepts:

• Foreign main proceeding: The primary insolvency case in the country where the debtor has its center of main interests (COMI). Recognition as a foreign main proceeding triggers an automatic stay of U.S. actions against U.S. assets.
• Foreign non-main proceeding: A secondary proceeding in a country where the debtor has an establishment but not its COMI. Recognition is more limited.
• Foreign representative: The administrator, liquidator, or trustee appointed in the foreign proceeding, who petitions U.S. courts for recognition.

Chapter 15 cases are common for European companies with U.S.-listed debt, Latin American issuers with New York-law bonds, and offshore holding structures with U.S. operating subsidiaries.

Comparison table

Chapter	Outcome	Who runs it	Typical equity outcome
Chapter 7	Liquidation — company ceases to exist	Court-appointed trustee	Wiped out in virtually all cases
Chapter 11	Reorganization — company continues or sells as going concern	Debtor in possession (management); trustee only if cause shown	Usually wiped out; occasionally receives residual value in solvent-adjacent cases
Chapter 15	Ancillary — defers to foreign main proceeding	Foreign representative recognized by U.S. court	Determined by foreign proceeding law

When Chapter 11 converts to Chapter 7

A Chapter 11 case can convert to Chapter 7 voluntarily, at the debtor's request, or involuntarily, on motion by a creditor or the U.S. Trustee. Conversion is common when reorganization fails — the debtor cannot confirm a plan, runs out of cash to fund operations during the case, or loses the support of key creditor constituencies. Upon conversion, the debtor in possession loses control, a Chapter 7 trustee is appointed, and the case shifts from reorganization to liquidation.

Conversion is generally worse for all parties than a successful Chapter 11. Administrative claims incurred during the failed reorganization — professional fees, DIP financing costs, post-petition trade debt — have super-priority and consume liquidation proceeds before pre-petition creditors are paid. The longer a failed Chapter 11 runs before conversion, the deeper the administrative layer that sits ahead of general unsecured creditors.

What each chapter means for shareholders and creditors

The filing date matters for a specific reason: the automatic stay freezes most litigation and enforcement actions as of that date, and the petition establishes the universe of pre-petition claims. For anyone holding the debtor's securities or credit instruments:

• Secured creditors are entitled to the value of their collateral. In Chapter 11, they are impaired only if the plan provides them less than that value; in Chapter 7, the trustee either sells the collateral and pays the lien or abandons it to the creditor.
• Unsecured creditors recover based on the assets remaining after secured claims. In reorganizations, they often receive new debt, equity in the reorganized company, or a combination. Recovery rates vary widely by industry and capital structure.
• Equity holders sit at the bottom of the absolute priority rule. In Chapter 7 cases and in most contested Chapter 11 cases involving insolvent companies, equity receives nothing. In pre-packaged plans where the company is near solvent, existing equity may retain a residual stake as a negotiated concession.

Public company filings — the 8-K disclosing a voluntary petition, the court docket entries, and the plan disclosure statement — are the primary sources for tracking these events systematically. Rating agency downgrades and trading halts on the equity often precede the formal filing by hours or days, but the petition itself is the definitive disclosure.