Chapter 7 Bankruptcy
In a Chapter 7 case—the type of bankruptcy most frequently associated with a fresh start—the debtor gets particular debts—such as credit card balances, medical bills, and personal loans—wiped out in a streamlined process without paying into a monthly repayment plan. In exchange, the debtor agrees that the bankruptcy trustee—the individual responsible for overseeing the case—can sell certain property, called nonexempt property. The trustee then distributes the sales proceeds to creditors according to a priority ranking system. A debtor doesn’t have to give up all assets, however. You’ll be able to exempt (keep) the things necessary to continue working and maintaining a home, such as household furnishings, clothing and a small amount of equity in a vehicle. Many filers can retain all of their property. Each state decides what its residents can keep.
A Chapter 7 bankruptcy won’t discharge all debt, however. Some debt—called non-dischargeable debt—remains with you even after bankruptcy (and ultimately, until you pay it off). Examples of non-dischargeable debt include:
• domestic support obligations, such as spousal and child support
• income taxes incurred within the last three years (and sometimes older taxes, too)
• injury or wrongful death awards stemming from operating a vehicle while intoxicated
• student loan debt (unless you can show that it would be unfair to require repayment).
Both individuals (consumers) and businesses can file for Chapter 7 bankruptcy.
Important Aspects of Chapter 7 Bankruptcy
Here are some of the key points you'll want to remember:
Eligibility. Not everyone can file and receive a discharge under this chapter. For example, if most of your debts are consumer debts (as opposed to business bankruptcy debt), and your disposable income is sufficient to fund a Chapter 13 repayment plan after subtracting certain allowed expenses, you won't be allowed to use Chapter 7 bankruptcy. You’re also limited to a discharge every eight years.
Property. You’ll be able to exempt the essential property needed to work and maintain a home such as clothes, some equity in a car, and household furnishings. Many debtors who file for Chapter 7 bankruptcy find that all of their property is exempt under applicable state exemption laws (and sometimes federal exemption laws).
Secured debt. If you owe money on a secured debt, such as a mortgage or car loan, you’ll have a choice of allowing the creditor to repossess the property (and discharge the debt) or, if you’re current on your payments, keeping the property and continuing to make your payments under the contract.
Non-dischargeable consumer debt. Bankruptcy works well to eliminate many debts owed by individuals, such as credit card balances, medical bills, and personal loans. However, some debt, including domestic support obligations and current income tax bills, can’t be wiped out in bankruptcy.
Non-dischargeable business debt. Bankruptcy doesn’t wipe out debt owed by a business. It’s rare for a company (other than a sole proprietorship) to file for Chapter 7 bankruptcy because in most cases, more efficient ways to wind down the business exist. This chapter works well when the owners want the bankruptcy trustee to sell and distribute assets to creditors in a transparent manner. However, there are several ways owners can find themselves personally liable for the business debt. Contact an attorney if you’re considering filing a business bankruptcy.