What is 'Chapter 7'

Chapter 7 is a bankruptcy proceeding in which a company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company's assets, the proceeds are used to pay off the debts, and then the remaining debt is discharged. Individuals may declare Chapter 7 bankruptcy as well.

BREAKING DOWN 'Chapter 7'

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other asset of the company. Next in line are unsecured creditors and then investors. This phenomenon is known as "absolute priority."

In order to file Chapter 7 bankruptcy, you must not have filed bankruptcy in the last six to eight years. You must also submit information to the courts about your finances.

Bankruptcy Forms

In order to complete Chapter 7 bankruptcy forms, debtors must have a list of their creditors and the amounts owed. They must also have information about their income, property and monthly living expenses. If the judge determines that the debtor has too much money left over each month after paying bills, he may order the individual to file Chapter 13 instead. Chapter 13 involves a court-mandated repayment plan for a set length of time.

Discharge of Debts

When an individual files a Chapter 7 bankruptcy, most of his debts are discharged, but there are some exceptions. Debts related to alimony and child support, some taxes, and student loans guaranteed by the government cannot be discharged in a bankruptcy. In addition, individuals who owe the government money for overpayment of benefits such as SNAP cannot have those debts discharged through a bankruptcy proceeding.

Exempt Property

When you file Chapter 7 bankruptcy, the trustee sells your assets to repay your creditors, but some assets are exempt from this process. Property exemptions vary from state to state, but in many cases, debtors are allowed to keep their primary home, their car and their personal possessions.

Consumer Credit Counseling

If an individual wants to file Chapter 7 bankruptcy and he only has consumer debts, he must also file a certificate of credit counseling. This indicates that the individual has attempted to work with a credit counseling service to avoid bankruptcy. These nonprofit organizations help people consolidate debts, negotiate with creditors and pay off credit cards. They also offer education about finances and debts to help debtors get back on track.

RELATED TERMS
  1. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
  2. 341 Meeting

    The meeting of creditors that occurs when an individual files ...
  3. Bankruptcy Trustee

    A person appointed by the United States Trustee, an officer of ...
  4. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...
  5. Discharge In Bankruptcy

    A permanent order that releases the debtor from personal liability ...
  6. Keep And Pay

    A bankruptcy allowance that lets an individual keep an asset ...
Related Articles
  1. Personal Finance

    The Other Personal Bankruptcy Option: Chapter 13

    In a Chapter 13 bankruptcy, filers develop a plan to repay all or part of their "past due" debt. Any allowable debt left afterward is discharged.
  2. Taxes

    5 Myths About Personal Bankruptcy

    There are some persistent myths that hover over the process of bankruptcy that are either half-truths or completely false.
  3. Taxes

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  4. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  5. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  6. Financial Advisor

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  7. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  8. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  9. Small Business

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
RELATED FAQS
  1. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
  2. Can I file for bankruptcy more than once?

    Learn about some of the limitations placed on debtors who are considering filing multiple bankruptcies, particularly if the ... Read Answer >>
  3. What happens when a corporation declares bankruptcy?

    Understand what options are available to corporations under bankruptcy protection, and learn what takes place after bankruptcy ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center