Chapter 7 Bankruptcy

Chapter 7, or “liquidation,” is the most popular type of bankruptcy in the United States. It is the most advantageous to the debtor when the debtor has very little or no income or assets. As the name implies, the process is to sell/liquidate all of a debtor's assets, distribute the proceeds to his/her creditors, and as a result wipe out all debts of the debtor, thus providing him or her with a new start. While some corporations do end up in chapter 7, the vast majority of chapter 7 bankruptcy protection cases are filed by private individuals. Practically speaking, most Chapter 7 bankruptcy cases that are approved by the trustee end up being no asset cases, meaning that what few assets the debtor has are protected by the many asset exemptions, leaving very little, if anything, for liquidation or distribution to the creditors. To prevent abuse of Chapter 7 protection by those who are generating a high level of income, the 2005 changes to the bankruptcy law in the US instituted a means test that debtors have to undergo in order to be eligible to file under chapter 7 instead of chapter 13 bankruptcy. Asset exemptions vary in different States but, usually there are exemptions for your primary residence or home, car, furniture and furnishings, retirement savings in a 401k or IRA, and other types of assets. And, in actual practice in many cases not all of the debtor's debts are wiped out.

On the other hand, there are types of debt that is not erased in Chapter 7. They are student loans, child support and alimony, taxes from past three years, court ordered damages in connection with drunk driving convictions, fines or damages in connection with intentional harm to persons or property, claims based on fraud, and a few other kinds of debts. A chapter seven bankruptcy stays on your record for 10 years. One may file Chapter seven protection once every 6 years. The 6 year period commences on the filing date of the previous bankruptcy. Individuals, husband-wife, and business entities (including sole proprietorships, partnerships, and corporations) are eligible to file Chapter 7. If most of the debtors' property is exempt and his or her debts are mostly dischargeable in Chapter 7, then this is probably the best choice. The process typically takes about 90 days from beginning to end.