Chapter 7

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.

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