What Happens When You File Chapter 7 Bankruptcy?

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Chapter 7 bankruptcy is the most common form of bankruptcy that is filed for in the U.S., and its primary purpose is to give individual debtors a fresh start by discharging debts. Discover how individuals get to choose to keep certain exempt property under Chapter 7 with information from an independent CPA in this free video on Chapter 7 bankruptcy.

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Video Transcript

My name is Miranda Chook and I'm a CPA. Chapter seven bankruptcy refers to a section of the U.S. bankruptcy code that prescribes the process for a liquidation. This is the most common form of bankruptcy that is filed for in the U.S. The primary purpose of this is to give honest individual debtors a fresh start and they do this by doing what is called discharging debts. That means that the debtor is no longer liable for those debts. Discharge is only available to individuals and not to businesses. So for individuals, first you get to choose or keep certain exempt property. The purpose of this is to keep the debtor with no assets that they need from a day to day basis. Now the definition of an exempt property is a little bit different at the federal level and from state to state but generally, you are allowed to take the most advantageous definition of exempt property. In regardless of which definition, most of the time, examples of exempt property will include your 401K or your pension plan. The most unsecure debts will be discharged. If there is any non-exempt property and the trustee who's appointed by the court will liquidate those assets and distribute the proceeds to your creditors. Now keep in mind that a lot of debts actually will survive the bankruptcy such as mortgages, car loans, that means the debtor will still be liable for these debts. Also alimony, child support and taxes for recent years also will survive your bankruptcy and the debtor will still be liable for these. Now for businesses, when a business is badly in debt, can no longer pay their banks, bond holders or vendors, they can voluntarily, or sometimes they're forced by their creditors to go into a chapter seven liquidation bankruptcy. A trustee is appointed by the court and they will sell the assets of a business and distribute those proceeds to creditors. Now, certain property is not available to the trustee such as security that was used to collateralize a particular loan such as bondholders. So those bondholders still have their legally enforceable right to the collateral and they will recover their debt through the sale of that particular collateral. So if you find yourself in this circumstance, please check with an experienced financial adviser to see how this works with your specific circumstances.

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