Bankruptcy is a federal court process that is used to help eliminate or repay some or all debts while under the protection of the bankruptcy court. The most common forms of bankruptcy that are filed by consumers and businesses are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy is a liquidation bankruptcy which means that a trustee will be appointed to oversee and administer the assets of the debtor (individual or business) in order to pay creditors. Individuals and businesses can both file under Chapter 7.
For individuals, the usual purpose to filing a Chapter 7 is to seek a discharge of most, if not all, their debt. A discharge is a federal court order that prohibits creditors who are discharged from collecting the debts they are owed. This discharge generally comes 90-120 days after the filing of the case. Common types of debts that are dischargeable include credit card debt, personal loans, medical bills, and utility bills. Individuals are allowed to protect some or all of their assets through the use of exemptions that a provided by the state or federal government. These exemptions provide certain dollar value amounts of protection for different types of assets that protects them from being liquidated by the trustee. Most Chapter 7 cases do not result in a liquidation of any assets of the individual.
For businesses, Chapter 7 does not provide a discharge or an exemption of any assets, but merely provides an orderly liquidation and distribution of all assets to pay debts. The trustee oversees and administers this process. This is often a more simple and less costly way to go out of business.
Debts that are not Dischargeable
There are some debts that are not dischargeable in Chapter 7. Debts owed for child support, spousal support (alimony), divorce settlement and most tax debts are not dischargeable in Chapter 7. Student loans, whether federal or private, are also generally not dischargeable in Chapter 7 unless the court finds that repayment would cause an undue hardship on the individual. This is a very high hurdle and a careful analysis of a person’s case is necessary to determine whether this is an option.
Some debts are attached to an asset and are considered to be a secured debt. Examples of common secured debts include mortgages, car loans, and some furniture or jewelry loans. While these debts are generally still dischargeable, the liens on the property generally survive the discharge. This means that if the individual wishes to keep their asset (home, car, etc.), they will have to continue making payments. Another option is to surrender the asset by giving it back to the creditor and allowing the discharge to eliminate any residual liability that might have resulted If the asset was then sold for less than what was owed on the loan. In some cases, the debt may be able to be paid completely for a lump sum less than what was originally owed by paying the replacement of value of the asset.
Eligibility for Chapter 7
Chapter 7 cases are generally reserved for those individuals that, at best, have only enough income to satisfy their current expenses but have little or no disposable income to pay their creditors. If the individual has enough disposable income to pay their creditors, he/she may be required to file under Chapter 13 and create a plan to repay their creditors some or all of their debts.
Not right for you? Learn about Chapter 13 Bankruptcy here