An Overview of Chapter 7 Bankruptcy
In the United States, a Chapter 7 bankruptcy is a liquidation governed under Chapter 7, Title 11 of the United States Bankruptcy Code. Both businesses or individuals may voluntarily enter Chapter 7 bankruptcy and businesses may be involuntarily forced into Chapter 7 bankruptcy. The key aspect of Chapter 7 bankruptcy, as opposed to other alternative bankruptcy forms, is that Chapter 7 bankruptcy is a liquidation of assets, rather than a reorganization plan for repayment.
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General
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A Chapter 7 bankruptcy involves the appointment of a trustee to oversee the sale of the assets and repayment of the creditors to an individual or business. The trustee organizes reimbursement of the creditors from proceeds generated from the sale of the assets in accordance with priorities set forth by the U.S. Bankruptcy Code and the bankruptcy court. Although unusual, in the instance that the proceeds from asset sales are in excess of the amounts due creditors plus costs, the excess proceeds are returned to the individual or business owners.
Businesses
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A Chapter 7 bankruptcy typically results in the automatic cessation of a business' operations. This does not necessary result in the organization being disbanded, however. When the trustee believes the business units may be more valuable as a whole than when stripped of the individual component assets, the trustee will often attempt to sell the business unit intact. Businesses may not emerge from Chapter 7 bankruptcy -- they are shuttered permanently. Often, however, popular brand names or trademarks may be sold to other businesses.
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Individuals
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Chapter 7 bankruptcy for individuals is often known as a "fresh start." This bankruptcy allows individuals to expunge all debts while retaining a few "exempt" assets. The assets exempted under Chapter 7 bankruptcy vary from state to state, but typically consist of, at a minimum, a first personal residence, a personal vehicle and small personal items of limited salable value. Typically, debts related to exempt assets such as mortgages and vehicle loans remain intact after a Chapter 7 bankruptcy, although they are sometimes altered.
Individuals - Warnings
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Not all types of debt are expunged through a Chapter 7 bankruptcy. In addition to debts attaching to exempt assets, typically child support, property taxes, income taxes, student loans and restitution related to illegal activities remain with the debtor.
Before receiving Chapter 7 bankruptcy status, a debtor must enter into credit counseling with a court-approved counseling agency. Once debts have been discharged through Chapter 7 bankruptcy, an individual is not eligible for another discharge of debts for eight years.
Alternatives
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The most common alternatives to Chapter 7 bankruptcy involve bankruptcies filed under Chapters 11 or 13 of the Bankruptcy Code and direct negotiation with creditors. Chapter 11 bankruptcies are typically used be businesses and involve a reorganization, or a court approved plan, that allows the business to restart normal operations. Chapter 13 bankruptcies are reorganization bankruptcies for individuals -- typically those with sufficient anticipated future income to repay the majority of debts. Direct negotiation with creditors avoids the costs of entering into a formal bankruptcy and often involves a reduction in debt amounts in exchange for immediate repayment.
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