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. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  2. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
  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. Chapter 15

    A chapter under the U.S. Bankruptcy Code, added to foster a cooperative ...
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

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  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. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  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

    Your Guide To Chapter 7 Bankruptcy

    Filing for Chapter 7 bankruptcy triggers an automatic stay that forbids businesses from collecting on your debt, or suing you.
  8. 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.
  9. 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.
  10. Financial Advisor

    Should You File For Bankruptcy?

    Find out how to determine whether this option will help or hurt your financial situation.
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. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
  3. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
  4. What are the differences between chapter 7 and chapter 11 bankruptcy?

    Chapter 7 bankruptcy is sometimes also called liquidation bankruptcy. Firms experiencing this form of bankruptcy are past ... Read Answer >>
  5. What effect did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2 ...

    Credit card companies and banks hate deadbeats who take from their bottom lines. They especially dislike the Chapter 7 bankruptcy ... Read Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    Learn about the various consequences, both positive and negative, that you can expect to result from your filing for bankruptcy. Read Answer >>
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center