What Is Chapter 7 Bankruptcy?

In General

Bankruptcy is a means to suspend debt collection efforts against you temporarily during the course of the Bankruptcy Court proceeding.  When you file for Bankruptcy the Federal Court grants an "automatic stay," which prevents creditors from attempting to collect on debts you owe them.

Your creditors may petition the Court for a relief of the automatic stay.  A creditor whose petition is granted may resume collection efforts.  Creditors whose loans are secured by property could then be permitted to take possession of that property.

At the end of the legal proceeding, if the Court finds that you are indeed bankrupt your qualifying debts are "discharged."  Discharged means that the debts are forgiven, and you have no further obligation for their repayment.  The Court could deny your discharge, if you concealed assets or fraudulently transferred assets prior to filing Bankruptcy.

Certain debts cannot be discharged.  Such debts include child support, alimony, student loans, debts incurred due to the debtor committing fraud or theft, and most taxes, although there are exceptions for some taxes under certain circumstances. 

The legal doctrine behind Bankruptcy is giving bankrupt debtors a "fresh start."  Depending upon your circumstances, to qualify for this fresh start you may have to give up certain property (Chapter 7 Bankruptcy) or you may have to repay a portion of your outstanding debt (Chapter 13 Bankruptcy) while under the supervision of the Court.


Chapter 7 Bankruptcy

Chapter 7 Bankruptcy is often referred to as a "straight" bankruptcy or as "liquidation."  In Chapter 7 Bankruptcy you turn over all of your non-exempt assets to a trustee appointed by the Court.  You probably will be able to keep some personal items and possibly even real estate, depending on the law of the State where you live and applicable federal laws concerning property that may be exempt from the requirement to deliver it to the trustee.  Ordinarily, debtors filing Bankruptcy have few non-exempt assets, and therefore lose little or no property.

The trustee liquidates i.e., sells, your assets and distributes the proceeds to your creditors.  You are then discharged of all debts, except those that do not qualify for discharge.  Your creditors can look for repayment only to the proceeds of the trustee liquidation sale of your assets, even if there are no assets to sell.  If your creditors are not repaid in full, they cannot later attempt to collect the shortfall from you.

In most Chapter 7 cases most debts are discharged about 90 days after filing.

As a result of the 2005 Bankruptcy Reform Act, it is now more difficult to qualify for Chapter 7 Bankruptcy.  Debtors are subject to a means test, and if their income exceeds limits set by the government, the debtor must file under Chapter 13 Bankruptcy.

Chapter 13 Bankruptcy