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Chapter 7 Bankruptcy Law Information
Chapter 7 Bankruptcy For Individuals
Individuals can file for bankruptcy in a federal court under
Chapter 7 ("straight bankruptcy", formally liquidation) or Chapter 13 (a
"reorganization", formally debt adjustment case). In a Chapter 7 bankruptcy, the
individual is allowed to keep certain exempt property, and most liens, such as
real estate mortgages, survive. Other assets, if any, are sold (liquidated) by
the interim trustee to repay creditors. Many types of unsecured debt are
cancelled. There are 19 (as of 2005) general classes of debt 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.
A disadvantage of filing for personal bankruptcy is that a record of it stays on
the individual's credit report for 10 years. This may make credit less available
and/or terms less favorable. That must be balanced against the removal of actual
debt from the filer's record by the bankruptcy, which tends to improve
creditworthiness. 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 or not the debtor can avoid a challenge by
the United States Trustee to his or her Chapter 7 filing as abusive. One aspect
of whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7
filing is whether or not he can otherwise afford to repay some or all of his
debts out of disposable income in the three 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.
It's widely held amongst bankruptcy practioners that the U.S. Trustee has become
much more aggressive in recent times in pursuing (what the U.S. Trustee believes
to be) abusive Chapter 7 filings. Through these activities it is achieving what
the Congress and most creditor-friendly commentors have consistently espoused,
i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 has clarified this area of concern by proposing
changes to the U.S. Code that include, along with many other reforms, language
that acts as an explicit means test for Chapter 7.
Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only
a few 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.
Chapter 7 Bankruptcy For Businesses
When a troubled business is badly in debt and unable to
service that debt or pay its creditors, it may file (or be forced by its
creditors to file) for bankruptcy in a federal court under Chapter 7
(liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the
business intends to sell all its assets, distribute the proceeds to its
creditors, and then cease operations.
This may or may not mean that all employees will lose their jobs; when a very
large company enters Chapter 7 bankruptcy, it may be that entire divisions of
the company are sold intact to other companies during the liquidation.
Secured creditors, such as bondholders, 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.
A corporation or other legal entity that is a debtor under Chapter 7 is not
entitled to a discharge of its debts: once all assets of the company have been
fully administered, the case is closed and the debts of the entity,
theoretically, continue to exist.
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