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When discussing the various types of bankruptcy an individual, a small or medium-sized business can file to protect itself from creditors, most often people think of Chapter 7 – a liquidation. According to the United States Courts' website, Chapter 7 bankruptcy is:
“The chapter of the Bankruptcy Code providing for ‘liquidation,' ( i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.)”
For many individuals, a Chapter 7 bankruptcy involves first an analysis of their assets, their liabilities, their income and expenses. From there, we determine what is the best approach to resolving their debts. A Chapter 7 is often favored by clients because it is relatively short, relatively inexpensive, and in many circumstances, offers the most complete relief available in bankruptcy – the discharge or elimination of your unsecured debts.
Chapter 7 of the Bankruptcy Code (11 U.S.C. §701, et seq.) sets forth the requirements and procedures for a debtor – the person or entity filing bankruptcy – to obtain bankruptcy relief. Recent changes to the Bankruptcy Code (the 2005 sweeping amendments to the Code referred to as BAPCPA), now require that attorneys and other “Debt Relief Agencies” explain to potential bankruptcy clients that they have alternatives to filing bankruptcy. A great explanation of these alternatives can be found on the US Court's own website here. Additional information about Chapter 7 bankruptcy can also be found on the US Court's website.
Chapter 7 Bankruptcy FAQ
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy -- also called "straight" or "liquidation" bankruptcy -- is designed to give you a fresh start. It wipes out most types of debt, and in return the bankruptcy trustee sells (liquidates) your nonexempt property in order to provide partial repayment to creditors. But because most people have very little property that is not exempt, most Chapter 7 bankruptcy filers end up keeping most or all of their property.
Will all of my unsecured debts be wiped out in Chapter 7 bankruptcy?
Chapter 7 bankruptcy wipes out most types of unsecured debt. Unsecured debts are those debts which are not tied to property -- like a home or car. Those unsecured debts wiped out by Chapter 7 bankruptcy include credit card debt, medical bills, and gasoline card debt.
However, some unsecured debt is nondischargeable in Chapter 7 bankruptcy -- meaning it is not wiped out. Nondischargeable debts include those for child and spousal support, student loans (except in very limited circumstances), recent debts for luxuries, debts incurred on the basis of fraud (such as lying on a credit application or writing a bad check), and tax debts first due within the previous three years. To learn more about which debts cannot be wiped out in Chapter 7 bankruptcy, see Nolo's articles What Bankruptcy Can and Cannot Do and When Chapter 7 Bankruptcy Isn't the Right Choice.
If I'm current on my mortgage, can I keep my home in a Chapter 7 bankruptcy?
You will be able to keep your home in Chapter 7 bankruptcy if all of your equity in the home is exempt. What is exempt equity? Although the Chapter 7 bankruptcy trustee may sell some categories of your property to pay unsecured debtors, you are allowed to keep a certain amount (and certain types) of property. The amount of property you are allowed to keep is called exempt property.
Bankruptcy law in all but a handful of states allows homeowners to keep a certain amount of the equity in their home -- this is called the homestead exemption. The exemption amount varies by state. If all of the equity in your property is exempt, the Chapter 7 bankruptcy trustee cannot use it to pay unsecured creditors and therefore has no reason to sell your home as part of the bankruptcy. As long as you keep current on your mortgage, the home remains yours. To learn more about homestead exemptions and other ways bankruptcy affects your home, see Nolo's article Your Home in Chapter 7 Bankruptcy.
What is Chapter 7 bankruptcy?
In some cases, the bankruptcy trustee may sell some of a Chapter 7 debtor's property in order to repay unsecured creditors. However, bankruptcy law in all states allows debtors to keep a certain amount (or certain types) of property -- called "exempt" property. Most states exempt things such as vehicles (up to a certain value), reasonably necessary clothing, reasonably necessary household furnishings and goods, household appliances, personal effects, pensions, tools of your trade (up to a certain amount), home equity (up to a certain amount), and public benefits. Because of the extensive list of exemptions, most debtors end up keeping all or most of their property. To learn more about what property you may or may not keep in Chapter 7 bankruptcy, see Nolo's article When Chapter 7 Bankruptcy Isn't the Right Choice.