What is chapter 7 bankruptcy?

How Can Chapter 7 Bankruptcy Help?

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Chapter 7 Bankruptcy can help individuals and business with financial problems find relief from debt without proposing a repayment plan. This is helpful for business that have decided to close and for individuals who are current on their secured and priority debts.

Chapter 7 Bankruptcy is governed by Chapter 7 of the Bankruptcy Code. Chapter 7 Bankruptcy is also known as a liquidation bankruptcy because debtors must liquidate non-exempt assets. This means the non-exempt assets are sold by the Chapter 7 Trustee for the benefit of creditors.

Fortunately, most consumer debtors’ assets are fully exempt under state or federal law and no assets are sold. When there are no assets to sell, the chapter 7 case is usually short and lasts approximately 3 months.

Clients might consider a Chapter 7 Bankruptcy if he or she has mainly unsecured debts, is current on the secured debts he or she wants to keep, has not filed another chapter 7 in the last 8 years and meets the income requirements. A business that plans to close might consider filing Chapter 7 Bankruptcy to liquidate assets. Often, the business will attempt to reorganize, but will later convert to a chapter 7 if the reorganization is unsuccessful. After filing a Chapter 7, Debtors will attend a meeting of creditors with their attorney. This meeting will occur 30 to 45 days after filing your Chapter 7 Petition. Although the meeting with the Chapter 7 Trustee is called a “Meeting of Creditors,” creditors are unlikely to attend. However, even though creditors may not attend the Meeting of Creditors, creditors may still participate in Chapter 7 proceedings. For instance, creditors and other parties have 60 days following the conclusion of the meeting to object to a debtor’s discharge. Your creditors may also wish to reaffirm secured property you wish to retain and make payments on or assume or reject contracts. If no objection is made to the discharge of your case and you have followed the bankruptcy rules, the Court can enter an order of discharge. A Discharge is the goal of a Chapter 7 Bankruptcy. Once you receive your Chapter 7 Discharge, you will have a Court Order discharging your dischargeable debts such as credit cards, medical bills and payday loans. You will continue to pay for your secured debts that you intend to retain, such as your home and your vehicles. You will also continue to make payments on your long-term debts like your student loans and child support. Creditors holding your dischargeable debts will be barred from contacting you or making any effort to collect your debts due to the Discharge Order.

For more information about Chapter 7 Bankruptcy, be sure to see our Chapter 7 eBook.

Need to Know More?

Have more questions about chapter 7 bankruptcy?

Three Quick Chapter 7 FAQ

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What is the means test?

In a chapter 7, the means test is one part that determines a Debtor’s eligibility to qualify for chapter 7 bankruptcy. Eligibility is based on median income compared to other families of the same household size in your county. If you don’t initially pass the means test; which is quite common, you may be allowed deductions. However, the United States Trustee (the component of the Department of Justice which oversees bankruptcy filings) carefully scrutinizes means test deductions, especially in chapter 7 cases. Because of this, it is important to consult with an attorney who has expertise in consumer bankruptcy law.

What are exemptions?

If property is exempt, you may keep the property even though you have filed bankruptcy. If property is non-exempt, the asset is to be turned over to the Trustee so that it can be liquidated for the benefit of your creditors. Fortunately, exemptions are generous, and most clients’ assets are fully exempt. Texas’ exemptions for instance, allow a Debtor to fully exempt their homestead; and Federal exemptions provide a generous wildcard exemption. However, exemption statutes cannot be mixed, and an otherwise exempt asset may be liquidated due to a paperwork mistake. Because of this, it is important to consult with a bankruptcy attorney.

Can small business owners file chapter 7?

Many business owners choose chapter 7. Moreover, if you are a consumer debtor and your debt is 51% business debt, you are exempt from the means test. This means if your net business income was over the median income, your income does not preclude you from filing chapter 7 bankruptcy. There are many variations of small business. Some small business owners may find one case, a personal case, takes care of their debts entirely. However, other small business owners may find they need multiple bankruptcy cases; a personal bankruptcy case and one or more chapter 7 business bankruptcy cases. A skilled bankruptcy attorney can help you determine what is best for your situation.