What is Chapter 7 Bankruptcy

What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy (a.k.a. liquidation or straight bankruptcy) is considered the most common form of liquidating the debts of an individual and/or a business with roughly 65% of all bankruptcy cases in the US being this type. The process is governed under Title 11 of the United States Code.

Chapter 7 for Businesses

When a business becomes so inundated with their debts that they are unable to pay them or service them, Chapter 7 Bankruptcy becomes an option for relieving their indebtedness. Additionally, it will cease business operations as well unless the Chapter 7 Trustees continues to operate the business. With larger companies, certain divisions of the company may be sold off while the parent organization stays in business. In this case, not all of the company’s employees lose their jobs.

Certain creditors (e.g. collateralized bondholders, mortgage lenders, etc.) have a legal right to seize any collateral used for procuring the financing or lending. Filing Chapter 7 Bankruptcy will not alleviate this. If the value of that collateral is equal to or exceeds the amount of the debt, the debtor is fully secured and cannot be involved in the asset liquidation process. There is no debt discharging per se where large corporations and partnerships are concerned. Instead, the corporation or partnership is “dissolved.”

Chapter 7 for Individuals

Chapter 7 Bankruptcy allows the individual to keep certain assets that are deemed exempt, the value of which will vary from state to state and typically includes the person’s home and an older vehicle. Other assets may be ordered by the court to be sold off so that creditors can recover some of their losses.

The Chapter 7 Bankruptcy proceeding usually discharges those debts that are considered “unsecured”. However, certain unsecured debts will not be discharged regardless. These usually include:

Alimony or spousal support

Child support

Income taxes (only those that less than 3 years old)

Property taxes

Student loans

For the individual, obtaining credit and/or any favorable credit terms becomes difficult for those who file Chapter 7 Bankruptcy as this will remain on their credit report for a period of up to 10 years.

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