Chapter 7 Bankruptcy Law

Chapter 7 bankruptcy is the most common form of bankruptcy in the United States.


Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States.


Businesses Filing Chapter 7

A chapter 7 bankruptcy can be filed (or can be even forced to file by creditors) in federal court when a business is badly in debt and unable to service that debt or to pay back its creditors. A chapter 7 bankruptcy means that the business ceases its operation.

The cessation of business operation by debtors does not mean that all employee of the company will loose their job. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.


The debtors’ petition filed in the court includes detailed financial information like his/her assets, debts, income and list of the assets that are being claimed as exempt. The court appoints a trustee whose roles is to review the bankruptcy filing, conduct the meeting of creditors, review the debtor’s eligibility for a discharge, liquidate (sell) any non-exempt assets and to distribute the proceeds to creditors. The court proceedings normally take 3-4 months.


The debtor attends a meeting with its creditors, usually 1 month after the petition filed. The objective of this meeting is to put debtors under oath and confirm all the financial declaration mentioned in the petition is true and accurate. The debtors have the right to ask questions regarding debtor’s assets and liabilities. In case of any disputes or complications debtors may have to attend a court hearing or additional Chapter 7 Bankruptcy Law examinations, and he will receive such notice from the court or his attorney.


If there are no objections to the debtor’s discharge, then the debtor receives a written notice from the court, stating that he has been discharged of all of his dischargeable debts.

Secured creditors like landholders, etc. have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not yet been paid for products they previously delivered to the company.


In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge. Only an individual can receive a Chapter 7 discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.


Individuals Filing Chapter 7

Although technically individual can file bankruptcy under chapter 11 but those figures are rare. Individuals normally file bankruptcy under chapter 7 or chapter 13 (a “reorganization”, or debt adjustment case).


In case of chapter 7 bankruptcy individual is allowed to keep certain properties exempted. The value of property that can be claimed as exempt varies from state to state.


Other assets, if any, are liquidated or sold by the trustee appointed by the court to repay creditors. There are 19 (as of 2005) general classes of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, most taxes, most student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determinate the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor.


One of the greatest disadvantages of filing bankruptcy can be seen on credit report. It stays there for 10 years. This may have a negative effect on credit rating. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.


Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor’s Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.


Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already ruined.


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