Chapter 7 Bankruptcy

If debt problems may cause you to file for bankruptcy, Chapter 7 bankruptcy might be an option for you. Chapter 7 is often called “liquidation” because assets may be sold to pay creditors. If you operate a business, this means that the business will likely cease operations. In a Chapter 7 bankruptcy, a Chapter 7 Trustee will be appointed right away. The Trustee is allowed to sell the business or sell assets and distribute the money to the creditors. This might mean that the people who work for you will lose their jobs. Sometimes, when a company is sold off, it is kept intact or partially intact, and business might proceed as usual, simply with a different person in charge.

Chapter 7 can also be filed by an individual or a married couple and will provide a fresh start in the form of a “discharge” of your debts. Individuals are allowed to keep certain property that is considered “exempt” under state and federal laws that may apply. However, some liens, such as real estate mortgages, are kept intact. Any assets that are not exempt may be sold off by the Chapter 7 Trustee in order to pay back your creditors. But most unsecured debts that you owed will be “discharged” (canceled). Even though most other types of unsecured debt (credit cards, medical expenses, personal debts) are canceled, there are some that you will still owe. This includes child support obligations, most taxes, most student loans and any fines or restitutions that you are responsible for regarding any crime you might have committed.

If you file Chapter 7 bankruptcy, you will be able to get a fresh financial start because of the “discharge” of debts you receive. And even though “exemptions” may be generous, and may allow you to keep most of your property, anything that you have of great value may be sold. So you are going to have to start over when it comes to rebuilding assets and wealth as well. Another disadvantage is that you are going to have a record of the bankruptcy on your credit report for 10 years. This might mean that you aren’t able to get loans or other types of credit, but if you are in financial trouble anyway, you are already facing this problem. A Chapter 7 bankruptcy will at least give you the opportunity to start building new credit in the future, without the old debts dragging you down financially.

There are some other things to consider before filing a Chapter 7 bankruptcy. For example, there is a “Means Test” which will measure your current income to see if you qualify for Chapter 7. The Means Test is one way that the bankruptcy law determines “abusive filings” in circumstances where some individuals can afford to pay back some or all of their debt over time from their income. If the law says you don’t qualify for Chapter 7, then you might still opt to file for a Chapter 13 bankruptcy instead. A Chapter 13 bankruptcy would allow you to pay back the debts you can afford to pay over a 3 to 5 year period of time, and it would also allow you to keep all of your property rather than having some of it sold off to pay creditors.