You may be considering filing for bankruptcy and have heard of Chapter 7 bankruptcy. However, you may not know what this term actually means. Bankruptcy law in the United States is broken up into a number of “chapters.” Of these chapters, Chapter 7 is by far one of the most common, and it is available to both businesses and individuals.
Chapter 7 bankruptcy is also sometimes referred to as liquidation, because liquidation of assets is an integral part of filing for this form of bankruptcy. This liquidation occurs very differently depending on whether the Chapter 7 bankruptcy was filed by a business or if it was filed by an individual.
When a business files for Chapter 7 bankruptcy, or is forced to, the goal is usually to sell off all the business’s assets to pay back creditors. Indeed, the company going out of business is part of this process. The business will cease operation and have control of its assets taken over by a trustee appointed by the court. The trustee will sell all of the business’s assets and use the proceeds to pay off the business’s debts. If the business is a legal entity such as a partnership or corporation, that legal entity will cease to exist as part of the bankruptcy process. This may seem like a rather bleak possibility for those working for the business. However, certain employees may be able to keep their jobs if the business segment they work under is sold to another company as part of the liquidation.
Chapter 7 bankruptcy for individuals is quite different. First, for an individual to quality for Chapter 7 bankruptcy, something called a “means test” must be performed. In this means test, a person’s previous six months of income will be compared against a median income. This median income is calculated by using the previous six months of income from households of the same size as the debtor in the same state. If the debtor’s income is equal to or greater than this median income, the debtor will have to file for Chapter 13 bankruptcy and submit a payment plan to pay back his or her debts. However, if the debtor’s income is less than this figure, he or she can file for Chapter 7 bankruptcy.
Another big difference between individual and business Chapter 7 bankruptcy is the existence of exemptions from liquidation under individual Chapter 7. These liquidation exemptions can vary from state to state. However, they are often significant enough that many people who file for Chapter 7 bankruptcy do not have any of their assets liquidated at all. Liens such as mortgages and car loan security interests will remain. Debts that are not paid back through the liquidation may be discharged, which means the debtor will not have to pay them. There are, however, a few debts that can not be discharged. Debts exempt from Chapter 7 discharge may include child support, spousal support, student loans, and criminal fines.
To learn how to file and move through Chapter 7 bankruptcy or any other form of bankruptcy, you should contact a law firm that specializes in bankruptcy law.
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By an Act of Congress and the President of the United States, we are a federal Debt Relief Agency. Attorneys and/or law firms promoted through this Web site are also federally designated Debt Relief Agencies. They help people file for relief under the U.S. Bankruptcy Code. Disclosures Required Under the U.S. Bankruptcy Code.